Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

2020

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from     to     

Commission file number:  001-37352

Virtu Financial, Inc.

(Exact name of registrant as specified in its charter)

Delaware

32-0420206

Delaware

32-0420206
(State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer
Identification No.)

300 Vesey Street
New York, New York 10282

10282

One Liberty Plaza

10006
165 Broadway
New York,New York
(Address of principal executive offices)

(Zip Code)

(212) 418-0100

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Class A common stock, par value $0.00001 per shareVIRTThe NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐  Accelerated filer ☒  Non-accelerated filer   ☐  Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐     No ☒

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ☒

Large accelerated filer☒Accelerated filer☐Non-accelerated filer☐Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)13(a) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No☒

Class of Stock

Shares Outstanding
outstanding as of November 9th, 2017

6, 2020

Class A common stock, par value $0.00001 per share

89,256,963

122,918,976

Class C common stock, par value $0.00001 per share

18,344,223

10,466,939

Class D common stock, par value $0.00001 per share

79,610,490

60,091,740

1
Table of Contents





VIRTU FINANCIAL, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED September 30, 2017

2020

PAGE
NUMBER

PAGE
NUMBER

PART I -

3
2

5
3

6
4

9
5

11
6

58
46

90
74

92
77

93
77

93
78

94
83

95
83

95
83

95
83

96
84

97
86

    Unless the context otherwise requires, the terms “we,” “us,” “our,” “Virtu” and the “Company” refer to Virtu Financial, Inc., a Delaware corporation, and its consolidated subsidiaries and the term “Virtu Financial” refers to Virtu Financial LLC, a Delaware limited liability company and a consolidated subsidiary of ours.


1
Table of Contents

PART I - FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS
Index to Condensed Consolidated Financial Statements (Unaudited)

PAGE
NUMBER

3
2

5
3

6
4

9
5

11
6

2

1

Table of Contents

Virtu Financial, Inc. and Subsidiaries

Condensed Consolidated Statements of Financial Condition (Unaudited)
(in thousands, except share data)September 30,
2020		December 31,
2019
Assets
Cash and cash equivalents$567,677 $732,164 
Cash restricted or segregated under regulations and other98,285 41,116 
Securities borrowed1,325,843 1,928,763 
Securities purchased under agreements to resell17,413 143,032 
Receivables from broker-dealers and clearing organizations1,881,881 1,318,584 
Trading assets, at fair value:
Financial instruments owned2,208,147 2,068,734 
Financial instruments owned and pledged609,050 696,956 
Receivables from customers176,939 103,531 
Property, equipment and capitalized software (net of accumulated depreciation of $443,770 and $457,229 as of September 30, 2020 and December 31, 2019, respectively)116,550 116,089 
Operating lease right-of-use assets287,069 314,526 
Goodwill1,148,926 1,148,926 
Intangibles (net of accumulated amortization of $165,417 and $219,239 as of September 30, 2020 and December 31, 2019, respectively)473,317 529,638 
Deferred tax assets192,467 214,671 
Other assets ($66,805 and $48,966, at fair value, as of September 30, 2020 and December 31, 2019, respectively)339,161 252,640 
Total assets$9,442,725 $9,609,370 
Liabilities and equity
Liabilities
Short-term borrowings$123,993 $73,486 
Securities loaned705,789 1,600,099 
Securities sold under agreements to repurchase466,995 340,742 
Payables to broker-dealers and clearing organizations675,032 826,750 
Payables to customers141,980 89,719 
Trading liabilities, at fair value:
Financial instruments sold, not yet purchased2,790,135 2,497,958 
Tax receivable agreement obligations255,996 269,282 
Accounts payable, accrued expenses and other liabilities508,543 399,168 
Operating lease liabilities330,626 365,364 
Long-term borrowings1,636,829 1,917,866 
Total liabilities7,635,918 8,380,434 
Commitments and Contingencies (Note 15)
Virtu Financial Inc. Stockholders' equity
Class A common stock (par value $0.00001), Authorized — 1,000,000,000 and 1,000,000,000 shares, Issued — 125,059,325 and 120,435,912 shares, Outstanding — 122,880,554 and 118,257,141 shares at September 30, 2020 and December 31, 2019, respectively1 1 
Class B common stock (par value $0.00001), Authorized — 175,000,000 and 175,000,000 shares, Issued and Outstanding — 0 and 0 shares at September 30, 2020 and December 31, 2019, respectively0 0 
Class C common stock (par value $0.00001), Authorized — 90,000,000 and 90,000,000 shares, Issued and Outstanding — 10,466,939 and 12,887,178 shares at September 30, 2020 and December 31, 2019, respectively0 0 
Class D common stock (par value $0.00001), Authorized — 175,000,000 and 175,000,000 shares, Issued and Outstanding — 60,091,740 and 60,091,740 shares at September 30, 2020 and December 31, 2019, respectively1 1 
Treasury stock, at cost, 2,178,771 and 2,178,771 shares at September 30, 2020 and December 31, 2019, respectively(55,005)(55,005)
Additional paid-in capital1,143,149 1,077,398 
Retained earnings (accumulated deficit)343,817 (90,374)
Accumulated other comprehensive income (loss)(35,203)(647)
Total Virtu Financial Inc. stockholders' equity1,396,760 931,374 
3
Table of Contents

Virtu Financial, Inc. and Subsidiaries
Condensed Consolidated Statements of Financial Condition (Unaudited)

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

September 30, 

 

December 31, 

 

(in thousands, except share and interest data)

  

2017

    

2016

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

557,990

 

$

181,415

 

Cash and securities segregated under federal and other regulations

 

 

3,000

 

 

 —

 

Securities borrowed

 

 

1,525,403

 

 

220,005

 

Securities purchased under agreements to resell

 

 

8,249

 

 

 —

 

Receivables from broker dealers and clearing organizations

 

 

980,518

 

 

448,728

 

Trading assets, at fair value:

 

 

 

 

 

 

 

Financial instruments owned

 

 

2,203,248

 

 

1,683,999

 

Financial instruments owned and pledged

 

 

699,152

 

 

143,883

 

Property, equipment and capitalized software (net of accumulated depreciation of $118,671 and $113,184 as of September 30, 2017 and December 31, 2016, respectively)

 

 

144,686

 

 

29,660

 

Goodwill

 

 

859,598

 

 

715,379

 

Intangibles (net of accumulated amortization)

 

 

152,748

 

 

992

 

Deferred tax assets

 

 

224,804

 

 

193,859

 

Other assets ($98,837 and $36,480, at fair value, as of September 30, 2017 and December 31, 2016, respectively)

 

 

379,949

 

 

74,470

 

Total assets

 

$

7,739,345

 

$

3,692,390

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Short term borrowings

 

$

15,000

 

$

25,000

 

Securities loaned

 

 

582,915

 

 

222,203

 

Securities sold under agreements to repurchase

 

 

620,887

 

 

 —

 

Payables to broker dealers and clearing organizations

 

 

839,067

 

 

695,978

 

Payables to customers

 

 

25,550

 

 

 —

 

Trading liabilities, at fair value:

 

 

 

 

 

 

 

Financial instruments sold, not yet purchased

 

 

2,535,891

 

 

1,349,155

 

Tax receivable agreement obligations

 

 

232,552

 

 

231,404

 

Accounts payable and accrued expenses and other liabilities

 

 

287,327

 

 

69,281

 

Long-term borrowings

 

 

1,434,629

 

 

564,957

 

Total liabilities

 

$

6,573,818

 

$

3,157,978

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

Class A common stock (par value $0.00001), Authorized — 1,000,000,000 and 1,000,000,000 shares, Issued  — 89,718,355 and 40,436,580 shares, Outstanding — 89,256,963 and 39,983,514 shares at September 30, 2017 and December 31, 2016, respectively

 

 

 1

 

 

 —

 

Class B common stock (par value $0.00001), Authorized — 175,000,000 and 175,000,000 shares, Issued and Outstanding — 0 and 0 shares at September 30, 2017 and December 31, 2016, respectively

 

 

 —

 

 

 —

 

Class C common stock (par value $0.00001), Authorized — 90,000,000 and 90,000,000 shares, Issued — 18,344,223 and 19,810,707 shares, Outstanding — 18,344,223 and 19,810,707, at September 30, 2017 and December 31, 2016, respectively

 

 

 —

 

 

 —

 

Class D common stock (par value $0.00001), Authorized — 175,000,000 and 175,000,000 shares, Issued  and Outstanding — 79,610,490 and 79,610,490 shares at September 30, 2017 and December 31, 2016, respectively

 

 

 1

 

 

 1

 

Treasury stock, at cost, 461,392 and 453,066 shares at September 30, 2017 and December 31, 2016, respectively

 

 

(8,505)

 

 

(8,358)

 

Additional paid-in capital

 

 

900,586

 

 

155,536

 

Accumulated deficit

 

 

(51,304)

 

 

(1,254)

 

Accumulated other comprehensive income (loss)

 

 

2,596

 

 

(252)

 

Total stockholders' equity

 

$

843,375

 

$

145,673

 

Noncontrolling interest

 

 

322,152

 

 

388,739

 

Total equity

 

$

1,165,527

 

$

534,412

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

7,739,345

 

$

3,692,390

 

(in thousands, except share data)September 30,
2020		December 31,
2019
Noncontrolling interest410,047 297,562 
Total equity1,806,807 1,228,936 
Total liabilities and equity$9,442,725 $9,609,370 

See accompanying notes to the unaudited condensed consolidated financial statements.

Condensed Consolidated Financial Statements (Unaudited).

2

4

Table of Contents

Virtu Financial, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 For the Three Months Ended

 

 For the Nine Months Ended

 

 

September 30, 

 

September 30, 

 

 Three Months Ended
September 30,		Nine Months Ended
September 30,

(in thousands, except share and per share data)

  

2017

    

2016

    

2017

    

2016

 

(in thousands, except share and per share data)2020201920202019

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

Trading income, net

 

$

203,907

 

$

156,706

 

$

479,644

 

$

509,542

 

Trading income, net$441,295 $220,148 $1,987,756 $683,611 

Interest and dividends income

 

 

20,430

 

 

5,271

 

 

30,933

 

 

14,961

 

Interest and dividends income10,932 23,352 46,788 76,645 

Commissions, net and technology services

 

 

43,351

 

 

2,931

 

 

49,237

 

 

7,224

 

Commissions, net and technology services133,853 139,627 452,333 359,894 

Other, net

 

 

3,598

 

 

(102)

 

 

3,647

 

 

(102)

 

Other, net70,032 (787)75,758 (2,277)

Total revenue

 

 

271,286

 

 

164,806

 

 

563,461

 

 

531,625

 

Total revenue656,112 382,340 2,562,635 1,117,873 

 

 

 

 

 

 

 

 

 

 

 

 

 


Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

Brokerage, exchange and clearance fees, net

 

 

64,584

 

 

52,118

 

 

170,253

 

 

167,416

 

Brokerage, exchange, clearance fees and payments for order flow, netBrokerage, exchange, clearance fees and payments for order flow, net196,448 98,789 573,769 285,890 

Communication and data processing

 

 

45,998

 

 

17,903

 

 

83,190

 

 

53,578

 

Communication and data processing51,647 59,767 162,336 156,004 

Employee compensation and payroll taxes

 

 

72,341

 

 

20,816

 

 

111,053

 

 

64,182

 

Employee compensation and payroll taxes35,798 90,595 327,091 282,135 

Payments for order flow

 

 

12,071

 

 

 —

 

 

12,071

 

 

 —

 

Interest and dividends expense

 

 

31,242

 

 

15,615

 

 

58,456

 

 

43,249

 

Interest and dividends expense27,374 34,546 97,656 116,739 

Operations and administrative

 

 

24,183

 

 

5,543

 

 

38,107

 

 

16,198

 

Operations and administrative24,612 25,333 73,480 76,293 

Depreciation and amortization

 

 

15,602

 

 

7,158

 

 

29,157

 

 

22,685

 

Depreciation and amortization16,656 17,598 50,728 48,859 

Amortization of purchased intangibles and acquired capitalized software

 

 

6,440

 

 

53

 

 

6,546

 

 

159

 

Amortization of purchased intangibles and acquired capitalized software18,265 18,908 56,177 50,436 

Debt issue cost related to debt refinancing

 

 

4,869

 

 

 —

 

 

9,351

 

 

 —

 

Termination of office leasesTermination of office leases60 1,278 343 66,490 
Debt issue cost related to debt refinancing, prepayment and commitment feesDebt issue cost related to debt refinancing, prepayment and commitment fees9,916 0 27,282 7,894 

Transaction advisory fees and expenses

 

 

15,677

 

 

 —

 

 

24,188

 

 

155

 

Transaction advisory fees and expenses2,463 7,163 2,737 24,074 

Reserve for legal matter

 

 

 —

 

 

 —

 

 

(2,176)

 

 

 —

 

Charges related to share based compensation at IPO

 

 

181

 

 

333

 

 

545

 

 

1,444

 

Financing interest expense on long-term borrowings

 

 

24,593

 

 

7,393

 

 

40,141

 

 

21,569

 

Financing interest expense on long-term borrowings20,358 34,191 67,764 91,669 

Total operating expenses

 

 

317,781

 

 

126,932

 

 

580,882

 

 

390,635

 

Total operating expenses403,597 388,168 1,439,363 1,206,483 

Income (loss) before income taxes and noncontrolling interest

 

 

(46,495)

 

 

37,874

 

 

(17,421)

 

 

140,990

 

Income (loss) before income taxes and noncontrolling interest252,515 (5,828)1,123,272 (88,610)

Provision for (benefit from) income taxes

 

 

(6,505)

 

 

4,851

 

 

(2,918)

 

 

17,325

 

Provision for (benefit from) income taxes52,807 (644)200,044 (14,322)

Net income (loss)

 

 

(39,990)

 

 

33,023

 

 

(14,503)

 

 

123,665

 

Net income (loss)199,708 (5,184)923,228 (74,288)

Noncontrolling interest

 

 

26,472

 

 

(25,997)

 

 

6,466

 

 

(97,913)

 

Noncontrolling interest(82,999)872 (386,311)33,412 

Net income (loss) available for common stockholders

 

$

(13,518)

 

$

7,026

 

$

(8,037)

 

$

25,752

 

Net income (loss) available for common stockholders$116,709 $(4,312)$536,917 $(40,876)

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share

Basic

 

$

(0.17)

 

 

0.18

 

$

(0.17)

 

 

0.66

 

Basic$0.92 $(0.04)$4.31 $(0.38)

Diluted

 

$

(0.17)

 

 

0.18

 

$

(0.17)

 

 

0.66

 

Diluted$0.92 $(0.04)$4.29 $(0.38)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

Basic

 

 

79,199,142

 

 

38,351,465

 

 

53,520,346

 

 

38,264,139

 

Basic122,686,931 117,548,769 121,328,895 112,602,934 

Diluted

 

 

79,199,142

 

 

38,351,465

 

 

53,520,346

 

 

38,264,139

 

Diluted123,772,005 117,548,769 121,939,839 112,602,934 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(39,990)

 

$

33,023

 

$

(14,503)

 

$

123,665

 

Net income (loss)$199,708 $(5,184)$923,228 $(74,288)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

Foreign exchange translation adjustment, net of taxes

 

 

2,558

 

 

519

 

 

8,300

 

 

1,783

 

Foreign exchange translation adjustment, net of taxes7,812 (7,197)3,860 (10,057)
Net change in unrealized cash flow hedges gain (loss), net of taxesNet change in unrealized cash flow hedges gain (loss), net of taxes314 0 (64,425)0 

Comprehensive income (loss)

 

 

(37,432)

 

 

33,542

 

 

(6,203)

 

 

125,448

 

Comprehensive income (loss)207,834 (12,381)862,663 (84,345)

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

 

25,122

 

 

(26,370)

 

 

1,014

 

 

(99,195)

 

Less: Comprehensive income (loss) attributable to noncontrolling interest(86,761)3,598 (360,302)37,221 

Comprehensive income (loss) attributable to common stockholders

 

$

(12,310)

 

$

7,172

 

$

(5,189)

 

$

26,253

 

Comprehensive income (loss) attributable to common stockholders$121,073 $(8,783)$502,361 $(47,124)

See accompanying notes to the unaudited condensed consolidated financial statements.

Condensed Consolidated Financial Statements (Unaudited).

3

5

Table of Contents

Virtu Financial, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity

for the Year Ended December 31, 2016 (Unaudited)

Three and Nine Months Ended September 30, 2017

(Unaudited)

2020 and 2019
Class A Common StockClass C Common StockClass D Common StockTreasury StockAdditional Paid-in CapitalRetained Earnings (Accumulated Deficit)Accumulated Other Comprehensive Income (Loss)Total Virtu Financial Inc. Stockholders' EquityNon-Controlling InterestTotal Equity
(in thousands, except share and interest data)
(in thousands, except share and interest data)
SharesAmountsSharesAmountsSharesAmountsSharesAmountsAmounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

Class A 

 

Class C 

 

Class D 

 

 

 

 

 

Paid-in

 

Earnings

 

Other

 

Total

 

Non-

 

 

 

(in thousands, except

 

Common Stock

 

Common Stock

 

Common Stock

 

Treasury Stock

 

Capital

 

(Accumulated

 

Comprehensive

 

Stockholders'

 

Controlling

 

Total

 

share and interest data)

  

Shares

  

Amounts

  

Shares

  

Amounts

  

Shares

  

Amounts

  

Shares

  

Amounts

  

Amounts

  

Deficit)

  

Income (Loss)

  

Equity

  

Interest

  

Equity

  

Balance at December 31, 2015

 

38,379,858

 

$

 —

 

20,976,598

 

$

 —

 

79,610,490

 

$

 1

 

(169,649)

 

$

(3,819)

 

$

130,902

 

$

3,525

 

$

99

 

$

130,708

 

$

427,162

 

$

557,870

 

Balance at December 31, 2019Balance at December 31, 2019120,435,912 $1 12,887,178 $0 60,091,740 $1 (2,178,771)$(55,005)$1,077,398 $(90,374)$(647)$931,374 $297,562 $1,228,936 

Share based compensation

 

953,054

 

 —

 

(58,070)

 

 —

 

 —

 

 —

 

 —

 

 —

 

24,893

 

 —

 

 

 —

 

24,893

 

 —

 

24,893

 

Share based compensation1,854,961 — — — — — — — 21,357 — — 21,357 — 21,357 

Repurchase of Class C common stock

 

 —

 

 —

 

(4,153)

 

 —

 

 —

 

 —

 

 —

 

 —

 

(98)

 

 —

 

 

 —

 

(98)

 

 —

 

(98)

 

Treasury stock purchases

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(283,417)

 

(4,539)

 

 —

 

 —

 

 

 —

 

(4,539)

 

 —

 

(4,539)

 

Treasury stock purchases(642,869)— — — — — — — — (9,801)— (9,801)— (9,801)
Stock options exercisedStock options exercised213,129 — — — — — — — 3,206 — — 3,206 — 3,206 
Warrants issuedWarrants issued— — — — — — — — 11,486 — — 11,486 — 11,486 
Net income (loss)Net income (loss)— — — — — — — — — 221,069 — 221,069 167,169 388,238 
Foreign exchange translation adjustmentForeign exchange translation adjustment— — — — — — — — — — (5,884)(5,884)(4,512)(10,396)
Net change in unrealized cash flow hedges gains (losses)Net change in unrealized cash flow hedges gains (losses)— — — — — — — — — — (31,468)(31,468)(24,134)(55,602)
Distribution from Virtu Financial to non-controlling interestDistribution from Virtu Financial to non-controlling interest— — — — — — — — — — — — (19,165)(19,165)
DividendsDividends— ��� — — — — — — — (29,602)— (29,602)— (29,602)
Issuance of common stock in connection with employee exchangesIssuance of common stock in connection with employee exchanges724,327 — — — — — — — — — — — — — 
Repurchase of Virtu Financial Units and corresponding number of Class C common stock in connection with employee exchangesRepurchase of Virtu Financial Units and corresponding number of Class C common stock in connection with employee exchanges— — (724,327)— — — — — — — — — — — 
Balance at March 31, 2020Balance at March 31, 2020122,585,460 $1 12,162,851 $0 60,091,740 $1 (2,178,771)$(55,005)$1,113,447 $91,292 $(37,999)$1,111,737 $416,920 $1,528,657 
Share based compensationShare based compensation36,771 — — — — — — — 7,839 — — 7,839 — 7,839 
Treasury stock purchasesTreasury stock purchases(8,727)— — — — — — — — (360)— (360)— (360)
Stock options exercisedStock options exercised404,794 — — — — — — — 7,691 — — 7,691 — 7,691 
Net income (loss)Net income (loss)— — — — — — — — — 199,142 — 199,142 136,143 335,285 
Foreign exchange translation adjustmentForeign exchange translation adjustment— — — — — — — — — — 3,674 3,674 2,770 6,444 
Net change in unrealized cash flow hedges gains (losses)Net change in unrealized cash flow hedges gains (losses)— — — — — — — — — — (5,242)(5,242)(3,895)(9,137)
Distribution from Virtu Financial to non-controlling interestDistribution from Virtu Financial to non-controlling interest— — — — — — — — — — — — (145,211)(145,211)
DividendsDividends— — — — — — — — — (30,201)— (30,201)— (30,201)
Issuance of common stock in connection with employee exchangesIssuance of common stock in connection with employee exchanges1,635,912 — — — — — — — — — — — — — 
Repurchase of Virtu Financial Units and corresponding number of Class C common stock in connection with employee exchangesRepurchase of Virtu Financial Units and corresponding number of Class C common stock in connection with employee exchanges— — (1,635,912)— — — — — — — — — — — 
Balance at June 30, 2020Balance at June 30, 2020124,654,210 $1 10,526,939 $0 60,091,740 $1 (2,178,771)$(55,005)$1,128,977 $259,873 $(39,567)$1,294,280 $406,727 $1,701,007 
Share based compensationShare based compensation234,981 — — — — — — — 10,568 — — 10,568 — 10,568 
Treasury stock purchasesTreasury stock purchases(79,570)— — — — — — — — (2,418)— (2,418)— (2,418)
Stock options exercisedStock options exercised189,704 — — — — — — — 3,604 — — 3,604 — 3,604 

Net income

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

32,980

 

 

 —

 

32,980

 

125,360

 

158,340

 

Net income— — — — — — — — — 116,709 — 116,709 82,999 199,708 

Foreign exchange translation adjustment

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

(351)

 

(351)

 

(814)

 

(1,165)

 

Foreign exchange translation adjustment— — — — — — — — — — 4,213 4,213 3,599 7,812 
Net change in unrealized cash flow hedges gains (losses)Net change in unrealized cash flow hedges gains (losses)— — — — — — — — — — 151 151 163 314 

Distribution from Virtu Financial to non-controlling interest

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 —

 

(162,969)

 

(162,969)

 

Distribution from Virtu Financial to non-controlling interest— — — — — — — — — — — — (83,441)(83,441)

Dividends

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(37,759)

 

 

 —

 

(37,759)

 

 —

 

(37,759)

 

Dividends— — — — — — — — — (30,347)— (30,347)— (30,347)

Issuance of common stock in connection with secondary offering, net of offering costs

 

1,103,668

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

16,677

 

 —

 

 

 —

 

16,677

 

 —

 

16,677

 

Repurchase of Virtu Financial Units and corresponding number of Class C common stock in connection with secondary offering

 

 —

 

 —

 

(1,103,668)

 

 —

 

 —

 

 —

 

 —

 

 —

 

(17,383)

 

 —

 

 

 —

 

(17,383)

 

 —

 

(17,383)

 

Issuance of tax receivable agreements in connection with secondary offering

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

545

 

 —

 

 

 —

 

545

 

 —

 

545

 

Balance at December 31, 2016

 

40,436,580

 

$

 —

 

19,810,707

 

$

 —

 

79,610,490

 

$

 1

 

(453,066)

 

$

(8,358)

 

$

155,536

 

$

(1,254)

 

$

(252)

 

$

145,673

 

$

388,739

 

$

534,412

 

Share based compensation

 

58,536

 

 —

 

(34,019)

 

 —

 

 —

 

 —

 

 —

 

 —

 

12,314

 

 —

 

 

 —

 

12,314

 

 —

 

12,314

 

Repurchase of Class C common stock

 

 —

 

 —

 

(286,150)

 

 —

 

 —

 

 —

 

 —

 

 —

 

(4,592)

 

 —

 

 

 —

 

(4,592)

 

 —

 

(4,592)

 

Treasury stock purchases

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(8,326)

 

(147)

 

 —

 

 —

 

 

 —

 

(147)

 

 —

 

(147)

 

Net income (loss)

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(8,037)

 

 

 —

 

(8,037)

 

(6,466)

 

(14,503)

 

Foreign exchange translation adjustment

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

2,848

 

2,848

 

5,452

 

8,300

 

Distribution from Virtu Financial to non-controlling interest

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 —

 

(65,573)

 

(65,573)

 

Dividends

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(42,013)

 

 

 —

 

(42,013)

 

 —

 

(42,013)

 

Issuance of Class A common stock

 

48,076,924

 

 1

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

735,973

 

 —

 

 

 —

 

735,974

 

 —

 

735,974

 

Issuance of common stock in connection with employee exchanges

 

1,146,315

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

Issuance of common stock in connection with employee exchanges60,000 — — — — — — — — — — — — — 

Repurchase of Virtu Financial Units and corresponding number of Class C common stock in connection with employee exchanges

 

 —

 

 —

 

(1,146,315)

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

Issuance of tax receivable agreements in connection with employee exchange

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,355

 

 

 —

 

 

 —

 

 

1,355

 

 

 —

 

 

1,355

 

Balance at September 30, 2017

 

89,718,355

 

 

 1

 

18,344,223

 

 

 —

 

79,610,490

 

 

 1

 

(461,392)

 

 

(8,505)

 

 

900,586

 

 

(51,304)

 

 

2,596

 

 

843,375

 

 

322,152

 

 

1,165,527

 

6
Table of Contents
Class A Common StockClass C Common StockClass D Common StockTreasury StockAdditional Paid-in CapitalRetained Earnings (Accumulated Deficit)Accumulated Other Comprehensive Income (Loss)Total Virtu Financial Inc. Stockholders' EquityNon-Controlling InterestTotal Equity
(in thousands, except share and interest data)
SharesAmountsSharesAmountsSharesAmountsSharesAmountsAmounts
Repurchase of Virtu Financial Units and corresponding number of Class C common stock in connection with employee exchanges— — (60,000)— — — — — — — — — — — 
Balance at September 30, 2020125,059,325 $1 10,466,939 $0 60,091,740 $1 (2,178,771)$(55,005)$1,143,149 $343,817 $(35,203)$1,396,760 $410,047 $1,806,807 
Class A Common StockClass C Common StockClass D Common StockTreasury StockAdditional Paid-in CapitalRetained Earnings (Accumulated Deficit)Accumulated Other Comprehensive Income (Loss)Total Virtu Financial Inc. Stockholders' EquityNon-Controlling InterestTotal Equity
(in thousands, except share and interest data)
SharesAmountsSharesAmountsSharesAmountsSharesAmountsAmounts
Balance at December 31, 2018108,955,048 $1 13,749,886 $0 69,091,740 $1 (2,178,771)$(55,005)$1,010,468 $96,513 $(82)$1,051,896 $442,803 $1,494,699 
Share based compensation965,421 — — — — — — — 30,764 — — 30,764 — 30,764 
Treasury stock purchases(325,195)— — — — — — — — (8,805)— (8,805)— (8,805)
Stock options exercised86,224 — — — — — — — 859 — — 859 — 859 
Net income (loss)— — — — — — — — — (6,673)— (6,673)(6,946)(13,619)
Foreign exchange translation adjustment— — — — — — — — — — (2,136)(2,136)(1,608)(3,744)
Distribution from Virtu Financial to non-controlling interest— — — — — — — — — — — — (37,196)(37,196)
Dividends— — — — — — — — — (26,312)— (26,312)— (26,312)
Issuance of common stock in connection with employee exchanges240,000 — — — — — — — — — — — — — 
Repurchase of Virtu Financial Units and corresponding number of Class C common stock in connection with employee exchanges— — (240,000)— — — — — — — — — — — 
Balance at March 31, 2019109,921,498 $1 13,509,886 $0 69,091,740 $1 (2,178,771)$(55,005)$1,042,091 $54,723 $(2,218)$1,039,593 $397,053 $1,436,646 
Share based compensation257,750 — — — — — — — 16,443 — — 16,443 — 16,443 
Repurchase of Class C common stock— — (3,584)— — — — — — (96)— (96)— (96)
Treasury stock purchases(90,852)— — — — — — — — (2,093)— (2,093)— (2,093)
Stock options exercised35,120 — — — — — — — 72 — — 72 — 72 
Net income (loss)— — — — — — — — — (29,891)— (29,891)(25,594)(55,485)
Foreign exchange translation adjustment— — — — — — — — — — 548 548 336 884 
Distribution from Virtu Financial to non-controlling interest— — — — — — — — — — — — (14,891)(14,891)
Dividends— — — — — — — — — (28,592)— (28,592)— (28,592)
Issuance of common stock in connection with employee exchanges367,900 — — — — — — — — — — — — — 
Issuance of common stock in connection with secondary offering, net of offering costs9,000,000 — — — (9,000,000)— — — (375)— — (375)— (375)
Repurchase of Virtu Financial Units and corresponding number of Class C common stock in connection with employee exchanges— — (367,900)— — — — — — — — — — — 
Issuance of tax receivable agreements in connection with employee exchange— — — — — — — — (644)— — (644)— (644)
Balance at June 30, 2019119,491,416 $1 13,138,402 $0 60,091,740 $1 (2,178,771)$(55,005)$1,057,587 $(5,949)$(1,670)$994,965 $356,904 $1,351,869 
Share based compensation227,579 — — — — — — — 12,536 — — 12,536 — 12,536 
Treasury stock purchases(57,890)— — — — — — — — (1,167)— (1,167)— (1,167)
Net income— — — — — — — — — (4,312)— (4,312)(872)(5,184)
Foreign exchange translation adjustment— — — — — — — — — — (4,316)(4,316)(2,881)(7,197)
7
Table of Contents
Class A Common StockClass C Common StockClass D Common StockTreasury StockAdditional Paid-in CapitalRetained Earnings (Accumulated Deficit)Accumulated Other Comprehensive Income (Loss)Total Virtu Financial Inc. Stockholders' EquityNon-Controlling InterestTotal Equity
(in thousands, except share and interest data)
SharesAmountsSharesAmountsSharesAmountsSharesAmountsAmounts
Distribution from Virtu Financial to non-controlling interest— — — — — — — — — — — — (25,448)(25,448)
Dividends— — — — — — — — — (28,692)— (28,692)— (28,692)
Issuance of common stock in connection with employee exchanges233,877 — — — — — — — — — — — — — 
Repurchase of Virtu Financial Units and corresponding number of Class C common stock in connection with employee exchanges— — (233,877)— — — — — — — — — — — 
Balance at September 30, 2019119,894,982 $1 12,904,525 $0 60,091,740 $1 (2,178,771)$(55,005)$1,070,123 $(40,120)$(5,986)$969,014 $327,703 $1,296,717 
See accompanying notes to the unaudited condensed consolidated financial statements.

Condensed Consolidated Financial Statements (Unaudited).


4

8

Table of Contents

Virtu Financial, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)
 Nine Months Ended September 30,
(in thousands)20202019
Cash flows from operating activities
Net income (loss)$923,228 $(74,288)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization50,728 48,859 
Amortization of purchased intangibles and acquired capitalized software56,177 50,436 
Debt issue cost related to debt refinancing and prepayment7,555 7,896 
Amortization of debt issuance costs and deferred financing fees24,164 9,513 
Termination of office leases343 66,490 
Share-based compensation37,510 55,690 
Deferred taxes22,204 11,595 
Gain on sale of MATCHNow(58,652)0 
Other(14,750)(22,623)
Changes in operating assets and liabilities (1):
Securities borrowed602,920 (166,075)
Securities purchased under agreements to resell125,619 (3,330)
Receivables from broker-dealers and clearing organizations(563,297)(134,170)
Trading assets, at fair value(51,507)(34,392)
Receivables from customers(73,408)(133,844)
Operating lease right-of-use assets27,457 (246,555)
Other assets(67,469)(31,740)
Securities loaned(894,310)(54,381)
Securities sold under agreements to repurchase126,253 (78)
Payables to broker-dealers and clearing organizations(216,143)305,065 
Payables to customers52,261 (9,020)
Trading liabilities, at fair value292,177 (226,474)
Operating lease liabilities(34,738)270,407 
Accounts payable, accrued expenses and other liabilities109,276 (35,203)
Net cash provided by (used in) operating activities483,598 (346,222)
Cash flows from investing activities
Development of capitalized software(27,463)(25,638)
Acquisition of property and equipment(21,717)(17,101)
Proceeds from sale of MATCHNow60,592 0 
ITG Acquisition, net of cash acquired, described in Note 30 (835,581)
Investment in joint ventures(7,968)(4,500)
Net cash provided by (used in) investing activities3,444 (882,820)
Cash flows from financing activities
Distribution from Virtu Financial to non-controlling interest(247,816)(77,535)
Dividends(90,150)(83,596)
Repurchase of Class C common stock0 (96)
Purchase of treasury stock(12,579)(12,065)
Stock options exercised14,502 931 
Short-term borrowings, net49,388 63,748 
Proceeds from long-term borrowings0 1,492,500 
Repayment of long term borrowings(288,500)(450,000)
Tax receivable agreement obligations(13,286)0 
Debt issuance costs(9,779)(35,702)
Issuance of common stock in connection with secondary offering, net of offering costs0 (375)
Net cash provided by (used in) financing activities(598,220)897,810 
Effect of exchange rate changes on cash and cash equivalents3,860 (9,996)
Net increase (decrease) in cash and cash equivalents(107,318)(341,228)
9
Table of Contents

(Unaudited)

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 

 

(in thousands)

    

2017

    

2016

 

Cash flows from operating activities

    

 

    

    

 

    

 

Net Income (loss)

 

$

(14,503)

 

$

123,665

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

29,157

 

 

22,685

 

Amortization of purchased intangibles and acquired capitalized software

 

 

6,546

 

 

159

 

Debt issue cost related to debt refinancing

 

 

9,351

 

 

 —

 

Amortization of debt issuance costs and deferred financing fees

 

 

3,470

 

 

1,396

 

Share based compensation

 

 

10,924

 

 

9,440

 

Reserve for legal matter

 

 

(2,176)

 

 

 —

 

Equipment writeoff

 

 

1,335

 

 

428

 

Deferred taxes

 

 

1,489

 

 

9,345

 

Other

 

 

(444)

 

 

(1,267)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Securities borrowed

 

 

101,046

 

 

58,484

 

Securities purchased under agreements to resell

 

 

8,645

 

 

14,981

 

Receivables from broker dealers and clearing organizations

 

 

21,241

 

 

(36,756)

 

Trading assets, at fair value

 

 

1,020,821

 

 

(142,754)

 

Other Assets

 

 

26,248

 

 

1,705

 

Securities loaned

 

 

194,523

 

 

(42,656)

 

Securities sold under agreements to repurchase

 

 

(220,719)

 

 

 —

 

Payables to broker dealers and clearing organizations

 

 

(393,564)

 

 

(181,348)

 

Payables to customers

 

 

7,967

 

 

 —

 

Trading liabilities, at fair value

 

 

(569,911)

 

 

339,469

 

Accounts payable and accrued expenses and other liabilities

 

 

(25,675)

 

 

10,166

 

Net cash provided by operating activities

 

 

215,771

 

 

187,142

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Development of capitalized software

 

 

(7,929)

 

 

(6,044)

 

Acquisition of property and equipment

 

 

(13,932)

 

 

(8,933)

 

Investment in SBI Japannext

 

 

 —

 

 

(38,754)

 

Acquisition of KCG Holdings, net of cash acquired, described in Note 3

 

 

(799,303)

 

 

 —

 

Acquisition of Teza Technologies

 

 

(5,594)

 

 

 —

 

Proceeds from sale of DMM business

 

 

300

 

 

 —

 

Net cash used in investing activities

 

 

(826,458)

 

 

(53,731)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Distribution from Virtu Financial to non-controlling interest

 

 

(65,573)

 

 

(123,867)

 

Dividends

 

 

(42,013)

 

 

(28,117)

 

Purchase of treasury stock

 

 

(147)

 

 

 —

 

Short-term borrowings, net

 

 

(10,000)

 

 

(27,400)

 

Payments on repurchase of non-voting common interest

 

 

(6,092)

 

 

(1,500)

 

Proceeds from long-term borrowings

 

 

1,115,036

 

 

33,078

 

Repayment of senior secured credit facility

 

 

(206,473)

 

 

(3,825)

 

Repayment of KCG Notes

 

 

(480,987)

 

 

 —

 

Tax receivable agreement obligations

 

 

(7,045)

 

 

 —

 

Debt issuance costs

 

 

(52,528)

 

 

(93)

 

Issuance of common stock, net of offering costs

 

 

735,973

 

 

16,677

 

Repurchase of Virtu Financial Units and corresponding number of Class A and C common stock in connection with secondary offering

 

 

 —

 

 

(17,383)

 

Net cash provided by (used in) financing activities

 

 

980,151

 

 

(152,430)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

 

8,300

 

 

1,783

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash, cash equivalents, and restricted cash

 

 

377,764

 

 

(17,236)

 

Cash, cash equivalents, and Seg cash, beginning of period

 

 

181,415

 

 

163,235

 

Cash, cash equivalents, and Seg cash, end of period

 

$

559,179

 

$

145,999

 

 

 

 

 

 

 

 

 

Supplementary disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid for interest

 

$

59,524

 

$

43,827

 

Cash paid for taxes

 

$

5,744

 

$

15,008

 

 

 

 

 

 

 

 

 

Non-cash investing activities

 

 

 

 

 

 

 

Share based compensation to developers relating to capitalized software

 

$

1,448

 

$

5,187

 

See Note 3 for a description of non-cash investing activities relating to the acquisition of KCG

 

 

 

 

 

 

 

 Nine Months Ended September 30,
(in thousands)20202019
Cash, cash equivalents, and restricted or segregated cash, beginning of period773,280 736,047 
Cash, cash equivalents, and restricted or segregated cash, end of period$665,962 $394,819 
Supplementary disclosure of cash flow information
Cash paid for interest$137,750 $127,477 
Cash paid for taxes207,387 5,003 
Non-cash investing activities
Share-based and accrued incentive compensation to developers relating to capitalized software9,672 1,434 
Non-cash financing activities
Tax receivable agreement described in Note 60 (644)
(1) Net of ITG Acquisition for the three months ended March 31, 2019; see Note 3

See accompanying notes to the unaudited condensed consolidated financial statements.

Condensed Consolidated Financial Statements (Unaudited).

5

10

Table of Contents

Virtu Financial, Inc. and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
1. Organization and Basis of Presentation


Organization


The accompanying condensed consolidated financial statements include the accounts and operations of Virtu Financial, Inc. (“VFI”, or, collectively with its wholly owned or controlled subsidiaries, “Virtu” or the “Company”) beginning with its initial public offering (“IPO”) in April of 2015, along with the historical accounts and operations of Virtu Financial LLC (“Virtu Financial”) prior to the Company’s IPO.. VFI is a Delaware corporation whose primary asset is its ownership interest in Virtu Financial which it acquired pursuant to and subsequent to certain reorganization transactions (the “Reorganization Transactions”LLC (“Virtu Financial”) consummated in connection with its IPO.. As of September 30, 2017,2020, VFI owned approximately 48.0%64.2% of the membership interests of Virtu Financial. The CompanyVFI is the sole managing member of Virtu Financial and operates and controls all of the businesses and affairs of Virtu Financial and through Virtu Financial and its subsidiaries (the “Group”), continues to conduct the business now conducted by such subsidiaries.

.


The Company is a leading financial firm that leverages cutting edge technology to deliver liquidity to the global markets and innovative, transparent trading solutions to ourits clients. The Company has broad diversification,provides deep liquidity in combination with our proprietary technology platformover 25,000 financial instruments, on over 235 venues, in 36 countries worldwide to help create more efficient markets. Leveraging its global market structure expertise and low-cost structure, which enablesscaled, multi-asset infrastructure, the Company to facilitate risk transfer between global capital markets participants by supplying competitive liquidity and execution services while at the same time earning attractive margins and returns.

Virtu Financial was formed as a Delaware limited liability company on April 8, 2011 in connectionprovides its clients with a corporate reorganizationrobust product suite including offerings in execution, liquidity sourcing, analytics and acquisitionbroker-neutral, multi-dealer platforms in workflow technology. The Company’s product offerings allow its clients to trade on hundreds of the outstanding equity interestsvenues in over 50 countries and across multiple asset classes, including global equities, ETFs, foreign exchange, futures, fixed income and other commodities. The Company’s integrated, multi-asset analytics platform provides a range of Madison Tyler Holdings, LLC (“MTH”), an electronic trading firmpre and market maker. In connection with the reorganization, the members of Virtu Financial’s predecessor entity, Virtu Financial Operating LLC (“VFO”), a Delaware limited liability company formed on March 19, 2008, exchanged their interests in VFO for interests in Virtu Financialpost-trade services, data products and the members of MTH exchanged their interests in MTH for cash and/or interests in Virtu Financial.

compliance tools that its clients rely upon to invest, trade and manage risk across global markets.


On July 20, 2017 (the “Closing“KCG Closing Date”), the Company completed the all-cash acquisition (the “Acquisition”) of KCG Holdings, Inc. (“KCG”). Pursuant to the terms (the “Acquisition of the Agreement and Plan of Merger, dated as of April 20, 2017KCG”).

On March 1, 2019 (the “Merger Agreement”“ITG Closing Date”), by and among the Company Orchestra Merger Sub,completed the acquisition of Investment Technology Group, Inc., and its subsidiaries (“ITG”) in an all-cash transaction valued at $30.30 per ITG share, for a Delaware corporation and an indirect wholly-owned subsidiarytotal of the Company (“Merger Sub”), and KCG,  Merger Sub merged with and into KCGapproximately $1.0 billion (the “Merger”“ITG Acquisition”), with KCG surviving the Merger as a wholly owned subsidiary of the Company. The transaction will extend Virtu’s scaled operating model to KCG’s wholesale market making businesses and broaden the distribution of Virtu’s technology and execution services to KCG’s extensive institutional client base. The Company expects to migrate trading of the combined company onto a single, proven technology, risk management, and analytics platform.. See Note 3 “Merger of Virtu Financial, Inc.and KCG Holdings Inc.”“ITG Acquisition” for further details.

ITG was a global financial technology company. ITG's business contributes to the Company's Execution Services segment.


Virtu Financial’s principal subsidiaries include Virtu Financial BD LLC (“VFBD”) andU.S. subsidiary is Virtu Americas LLC (“VAL”), which are self-clearingis a U.S. broker-dealers,broker-dealer. As part of the Company's integration efforts, the Company consolidated the operations of its other historical U.S. broker-dealer subsidiaries. Specifically, the broker-dealer activities of Virtu Financial BD LLC ("VFBD") and Virtu Financial Capital Markets LLC (“VFCM”("VFCM"), a were consolidated within VAL as of December 31, 2019 and the SEC registrations were withdrawn in March 2020. Subsequently, the Company consolidated the broker-dealer activities of Virtu ITG LLC ("VITG") and Virtu Alternet Securities ("VALT") within VAL as of June 1, 2020 and the SEC registrations were withdrawn in August 2020. Other principal U.S. broker-dealer, which self-clears its proprietary transactions and introduces the accounts of its affiliates and non-affiliated broker-dealers on an agency basis to other clearing firms that clear and settle transactions in those accounts;subsidiaries include Virtu Financial Global Markets LLC, (“VFGM”), a U.S. trading entity focused on futures and currencies; Virtu ITG Analytics LLC, a provider of pre and post-trade analysis, fair value, and trade optimization services; and Virtu ITG Platforms LLC, a provider of workflow technology solutions and network connectivity services. Principal foreign subsidiaries include Virtu Financial Ireland Limited (“VFIL”),and Virtu ITG Europe Limited, each formed in Ireland,Ireland; Virtu ITG Canada Corp. and Virtu Financial Canada ULC, each formed in Canada; Virtu Financial Asia Pty Ltd (“VFAP”),Ltd. and Virtu ITG Australia Limited, each formed in Australia,Australia; Virtu ITG Hong Kong Limited, formed in Hong Kong; and Virtu Financial Singapore Pte. Ltd. (“VFSing”)and Virtu ITG Singapore Pte. Ltd., each formed in Singapore, eachall of which are trading entities focused on asset classes in their respective geographic regions. Following the Acquisition, Virtu Financial’s principal subsidiaries also include VAL.

In September 2017,


On August 4, 2020, the Company completed the sale of its designated market maker (“DMM”) on the NYSE American. The resultsdisposition of the NYSE American DMMMATCHNow business are includedpursuant to a previously announced agreement with Cboe Global Markets, Inc., resulting in the Market Making segment,a gain of approximately $56.2 million, with contingent consideration of up through the dateto approximately $23.0 million, conditioned on future performance of its sale. On October 24, 2017, the Company announced it has entered into a definitive agreement to sell its fixed income trading venue, BondPoint, to Intercontinental Exchange.MATCHNow. See Note 19 "Subsequent Events"4 "Sale of MATCHNow" for further details.

6


Table of Contents

Prior to the Acquisition, the Company was managed and operated as one business, and, accordingly, operated under one reportable segment.  As a result of the acquisition of KCG, beginning in the third quarter of 2017 theThe Company has three2 operating segments: (i) Market Making;Making and (ii) Execution Services; and (iii)1 non-operating segment: Corporate. See Note 1721 “Geographic Information and Business Segments” for a further discussion of the Company’s segments.

Market Making

The Market Making segment principally consists


11
Table of market making in the cash, futures and options markets across global equities, options, fixed income, currencies and commodities. As a market maker, the Company commits capital on a principal basis by offering to buy securities from, or sell securities to, broker dealers, banks and institutions. The Company engages in principal trading in the Market Making segment directly to clients as well as in a supplemental capacity on exchanges, electronic communications networks (“ECNs”) and alternative trading systems (“ATSs”). The Company is an active participant on all major global equity and futures exchanges and also trades on substantially all domestic electronic options exchanges. As a complement to electronic market making, the cash trading business handles specialized orders and also transacts on the OTC Bulletin Board marketplaces operated by the OTC Markets Group Inc. and the Alternative Investment Market of the London Stock Exchange ("AIM"). 

Execution Services

The Execution Services segment comprises agency-based trading and trading venues, offering execution services in global equities, options, futures and fixed income on behalf of institutions, banks and broker dealers as well as technology services revenues. The Company earns commissions and commission equivalents as an agent on behalf of clients as well as between principals to transactions; in addition, the Company will commit capital on behalf of clients as needed. Agency-based, execution-only trading in the segment is done primarily through a variety of access points including: (i) algorithmic trading and order routing in global equities and options; (ii) institutional sales traders executing program, block and riskless principal trades in global equities and exchange traded funds ("ETFs"); (iii) a fixed income ECN that also offers trading applications; and (iv) an ATS for U.S. equities.Technology licensing fees are earned from third parties for licensing of the Company’s proprietary risk management and trading infrastructure technology and the provision of associated management and hosting services.

Corporate

The Corporate segment contains the Company's investments, principally in strategic trading-related opportunities and maintains corporate overhead expenses and all other income and expenses that are not attributable to the Company's other segments.

Contents


Basis of Consolidation and Form of Presentation


These condensed consolidated financial statements are presented in U.S. dollars, and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding financial reporting with respect to Form 10-Q and accounting standards generally accepted in the United States of America (“U.S. GAAP”) promulgated inby the Financial Accounting Standards Board (“FASB”) in the Accounting Standards Codification (“ASC” or the “Codification”)., and reflect all adjustments that, in the opinion of management, are normal and recurring, and that are necessary for a fair statement of the results for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with SEC rules and regulations. The condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The condensed consolidated financial statements of the Company include its equity interests in Virtu Financial and its subsidiaries. The Company operates and controls all business and affairs of Virtu Financial and its operating subsidiaries indirectly through its equity interest in Virtu Financial.

The


Certain reclassifications have been made to the prior periods’ condensed consolidated financial statements do not includein order to conform to the current period presentation. Such reclassifications are immaterial, individually and in the aggregate, to both current and all of the information and notes required by U.S. GAAP for completepreviously issued financial statements taken as a whole and should be read in conjunction with the Company’s annual reporthave no effect on Form 10-Kpreviously reported consolidated net income available to common stockholders.

Effective for the yearquarter ended December 31, 2016 (the “2016 10-K”), as amended, which was filed on March 13, 2017. The accompanying December 31, 2016 unaudited condensed consolidated statements of financial condition data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP for annual financial statement purposes. The accompanying condensed consolidated financial statements reflect all adjustments that are, inJune 30, 2020, the opinion of management, necessary for a fairCompany has changed the presentation of its Condensed Consolidated Statements of Comprehensive Income. As a result, the financial position, resultsCompany made the following reclassifications to prior period amounts to be consistent with current period presentation. For the three and nine months ended September 30, 2019, respectively, the Company reclassified $24.5 million and $71.7 million of operationsPayments for order flow to Brokerage, exchange, clearance fees and cash flowspayments for order flow, net, previously reported as Brokerage, exchange and clearance fees, net. Brokerage, exchange and clearance fees, net and Payments for order flow both represent costs associated with transacting trades. For the interim periods presented. The operating results for interim periods are not necessarily

three and nine months ended September 30, 2019, respectively, the Company reclassified $3.0 million and $8.9 million of sublease income from Other, net to Operations and administrative to net with other occupancy costs within Operations and administrative.

7


Table of Contents

indicative of the operating results for any future interim or annual period.

Principles of Consolidation, including Noncontrolling Interests

The condensed consolidated financial statements include the accounts of the Company and its majority and wholly ownedwholly-owned subsidiaries. As sole managing member of Virtu Financial, the Company exerts control over the Group’s operations. The Company consolidates Virtu Financial and its subsidiaries’ financial statements and records the interests in Virtu Financial that the Company does not own as noncontrolling interests. All intercompany accounts and transactions have been eliminated in consolidation.

As discussed in Note 3 “Merger of Virtu Financial, Inc.and KCG Holdings Inc.”, the Company is accounting for the acquisition of KCG under the acquisition method of accounting.  Under the acquisition method of accounting, the assets and liabilities of KCG, as of July 20, 2017, were recorded at their respective fair values and added to the carrying value of the Company's existing assets and liabilities. The reported financial condition and results of operations of the Company for the periods following the Acquisition reflect KCG's and the Company's balances and reflect the impact of purchase accounting adjustments. As the Company is the accounting acquirer, the financial results for the three and nine months ended September 30, 2017 comprise the results of the Company for the entire applicable period and the results of KCG from Closing Date through September 30, 2017. All periods prior to the Closing Date comprise solely the results of the Company.


2. Summary of Significant Accounting Policies


Use of Estimates


The Company’sCompany's condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which require management to make estimates and assumptions regarding measurements including the fair value of trading assets and liabilities, goodwill and intangibles, compensation accruals, capitalized software, income tax, tax receivable agreements, leases, litigation accruals, and other matters that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ materially from those estimates.


Earnings Per Share


Earnings per share (“EPS”) is calculated on both a basic and diluted basis. Basic EPS excludes dilution and is calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated by dividing the net income (loss) available for common stockholders by the diluted weighted average shares outstanding for that period. Diluted EPS includes the determinants of the basic EPS and, in addition, reflects the dilutive effect of shares of common stock estimated to be distributed in the future under the Company’s share based compensation plans.

future.


The Company grants restricted stock awards ("RSAs") and restricted stock units (“RSUs”), certain of which entitle recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of
12
Table of Contents
common stock. As a result, the unvested RSAs and participating unvested RSUs meet the definition of a participating security requiring the application of the two-class method. Under the two-class method, earnings available to common shareholders, including both distributed and undistributed earnings, are allocated to each class of common stock and participating securities according to dividends declared and participating rights in undistributed earnings, which may cause diluted EPS to be more dilutive than the calculation using the treasury stock method.


Cash and Cash Equivalents


Cash and cash equivalents include money market accounts, which are payable on demand, and short-term investments with an original maturity of less than 90 days. The carrying amount of such cash equivalents approximates their fair value due to the short-term nature of these instruments. These assets would be categorized as Level 1 in the fair value hierarchy if they were required to be recorded at fair value. The Company maintains cash in bank deposit accounts that, at times, may exceed federally insured limits.

 The Company manages this risk by selecting financial institutions deemed highly creditworthy to minimize the risk.

8


Table of Contents

Cash and securitiesrestricted or segregated under federalregulations and other regulations

Effective uponrepresents (i) special reserve bank accounts for the acquisitionexclusive benefit of KCG,customers (“Special Reserve Bank Account”) maintained by VAL in accordance with Rule 15c3-3 of the Company maintains custodySecurities Exchange Act of customer1934, as amended (“Customer Protection Rule”), or proprietary accounts of broker-dealers, (ii) funds on deposit for Canadian and is obligated by rulesEuropean trade clearing and regulations mandated bysettlement activity, (iii) segregated balances under a collateral account control agreement for the SECbenefit of certain customers in Hong Kong, and (iv) funds relating to segregate or set aside cash and/or qualified securities to satisfy these regulations, which have been promulgated to protect customer assets. The amounts recognized as Cash and securities segregated under federal and other regulations approximate fair value. These assets would be categorized as Level 1 in the fair value hierarchy if they were required to be recorded at fair value.

securitization of bank guarantees supporting certain of the Company’s foreign leases.


Securities Borrowed and Securities Loaned


The Company conducts securities borrowing and lending activities with external counterparties. In connection with these transactions, the Company receives or posts collateral. These transactions are collateralized bycollateral, which comprises cash and/or securities. In accordance with substantially all of its stock borrow agreements, the Company is permitted to sell or repledge the securities received. Securities borrowed or loaned are recorded based on the amount of cash collateral advanced or received. The initial cash collateral advanced or received generally approximates or is greater than 102% of the fair value of the underlying securities borrowed or loaned. The Company monitors the fair value of securities borrowed and loaned, and delivers or obtains additional collateral as appropriate. Receivables and payables with the same counterparty are not offset in the condensed consolidated statementsCondensed Consolidated Statements of financial condition.Financial Condition. Interest received or paid by the Company for these transactions is recorded gross on an accrual basis under interestInterest and dividends income or interestInterest and dividends expense in the condensed consolidated statementsCondensed Consolidated Statements of comprehensive income (loss).

Comprehensive Income.


Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase


In a repurchase agreement, securities sold under agreements to repurchase are treated as collateralized financing transactions and are recorded at contract value, plus accrued interest, which approximates fair value. It is the Company’sCompany's policy that its custodian takestake possession of the underlying collateral securities with a fair value approximately equal to the principal amount of the repurchase transaction, including accrued interest. For reverse repurchase agreements, the Company typically requires delivery of collateral with a fair value approximately equal to the carrying value of the relevant assets in the condensed consolidated statementsCondensed Consolidated Statements of financial condition.Financial Condition. To ensure that the fair value of the underlying collateral remains sufficient, the collateral is valued daily with additional collateral obtained or excess collateral returned, as permitted under contractual provisions. The Company does not net securities purchased under agreements to resell transactions with securities sold under agreements to repurchase transactions entered into with the same counterparty. 

The Company has also entered into bilateral and tri-party term and overnight repurchase and other collateralized financing agreements which bear interest at negotiated rates. The Company receives cash and makes delivery of financial instruments to a custodian who monitors the market value of these instruments on a daily basis. The market value of the instruments delivered must be equal to or in excess of the principal amount loaned under the repurchase agreements plus the agreed upon margin requirement. The custodian may request additional collateral, if appropriate. Interest received or paid by the Company for these transactions is recorded gross on an accrual basis under interestInterest and dividends income or interestInterest and dividends expense in the condensed consolidated statementsCondensed Consolidated Statements of comprehensive income (loss).

Comprehensive Income.


13
Table of Contents
Receivables from/Payables to Broker-dealers and Clearing Organizations

Amounts receivable from broker-dealers and clearing organizations may be restricted to the extent that they serve as deposits for securities sold, not yet purchased. At September 30, 2017 and December 31, 2016, receivables


Receivables from and payables to broker-dealers and clearing organizations primarily representedrepresent amounts due for unsettled trades, open equity in futures transactions, securities failed to deliver or failed to receive, deposits with clearing organizations or exchanges, and balances due from or due to prime brokers in relation to the Company’s trading. Amounts receivable from broker-dealers and clearing organizations may be restricted to the extent that they serve as deposits for securities sold, not yet purchased. The Company presents its balances, including outstanding principal balances on all broker credit facilities, on a net-by-counterparty basis within receivables from and payablepayables to broker-dealers and clearing organizations when the criteria for offsetting are met.


In the normal course of business, substantially alla significant portion of the Company’s securities transactions, money balances, and security positions are transacted with several third-party brokers. The Company is subject to credit risk to the extent any broker with whom it conducts business is unable to fulfill contractual obligations on its behalf. The Company monitors the financial condition of such brokers and does not anticipateto minimize the risk of any losses from these counterparties.

9


Table of Contents

Financial Instruments Owned Including Those Pledged as Collateral and Financial Instruments Sold, Not Yet Purchased


Financial instruments owned and Financial instruments sold, not yet purchased relate to market making and trading activities, and include listed and other equity securities, listed equity options and fixed income securities.

The Company records financialFinancial instruments owned, including thoseFinancial instruments owned and pledged, as collateral, and financialFinancial instruments sold, not yet purchased at fair value. Gains and losses arising from financial instrument transactions are recorded net on a trade-date basis in tradingTrading income, net, in the condensed consolidatedCondensed Consolidated statements of comprehensive income (loss).

income.


Fair Value Measurements


Fair value is definesdefined as the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. Fair value measurements are not adjusted for transaction costs. The recognition of “block discounts” for large holdings of unrestricted financial instruments where quoted prices are readily and regularly available in an active market is prohibited. The Company categorizes its financial instruments into a three-levelthree level hierarchy which prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy level assigned to each financial instrument is based on the assessment of the transparency and reliability of the inputs used in the valuation of such financial instruments at the measurement date based on the lowest level of input that is significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements).


Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories based on inputs:


Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;


Level 2 — Quoted prices in markets that are not active and financial instruments for which all significant inputs are observable, either directly or indirectly; or


Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

Transfers in or out of levels are recognized based on the beginning fair value of the period in which they occurred.


Fair Value Option


The fair value option election allows entities to make an irrevocable election of fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are recorded in other, net in the condensed consolidated statementsCondensed Consolidated Statements of comprehensive income (loss).Comprehensive Income. The decision to elect the fair value option is determined on an instrument by instrument basis, which must be applied to an entire instrument and is irrevocable once elected.


14
Table of Contents
Derivative Instruments

- Trading


Derivative instruments are used for trading purposes, including economic hedges of trading instruments, which are carried at fair value, and include futures, forward contracts, and options. Unrealized gainsGains or losses on these derivative instruments are recognized currently within tradingTrading income, net in the condensed consolidated statementCondensed Consolidated Statement of comprehensive income (loss).Comprehensive Income. Fair values for exchange-traded derivatives, principally futures, are based on quoted market prices. Fair values for over-the-counter derivative instruments, principally forward contracts, are based on the values of the underlying financial instruments within the contract. The underlying instruments are currencies, which are actively traded.

The Company presents its trading derivatives balances on a net-by-counterparty basis when the criteria for offsetting are met.

Cash flows associated with such derivative activities are included in cash flows from operating activities on the Condensed Consolidated Statements of Cash Flows.

10


Derivative Instruments - Hedging

TableThe Company may use derivative instruments for risk management purposes, including cash flow hedges used to manage interest rate risk on long-term borrowings and net investment hedges used to manage foreign exchange risk. The Company has entered into floating-to-fixed interest rate swap agreements in order to manage interest rate risk associated with its long-term debt obligations. Additionally, the Company may seek to reduce the impact of Contents

fluctuations in foreign exchange rates on its net investment in certain non-U.S. operations through the use of foreign currency forward contracts. For interest rate swap agreements and foreign currency forward contracts designated as hedges, the Company assesses its risk management objectives and strategy, including identification of the hedging instrument, the hedged item and the risk exposure and how effectiveness is to be assessed prospectively and retrospectively. The effectiveness of the hedge is assessed based on the overall changes in the fair value of the interest rate swaps or forward contracts. For instruments that meet the criteria to be considered hedging instruments under ASC 815, any gains or losses, to the extent effective, are included in Accumulated other comprehensive income on the Condensed Consolidated Statements of Financial Condition and Other comprehensive income on the Condensed Consolidated Statements of Comprehensive Income. The ineffective portion, if any, is recorded in Other, net on the Condensed Consolidated Statements of Comprehensive Income.


The Company presents its hedging derivatives balances on a net-by-counterparty basis when the criteria for offsetting are met. Balances associated with hedging derivatives are recorded within Receivables from/Payables to broker-dealers and clearing organizations on the Condensed Consolidated Statements of Financial Condition. Cash flows associated with such derivative activities are included in cash flows from operating activities on the Condensed Consolidated Statements of Cash Flows.

Client Commission Arrangements

Institutional customers are permitted to allocate a portion of their gross commissions to pay for research products and other services provided by third parties and the Company’s subsidiaries. The amounts allocated for those purposes are commonly referred to as client commission arrangements. The cost of independent research and directed brokerage arrangements is accounted for on an accrual basis. Commission revenue is recorded when earned on a trade date basis. Payments relating to client commission arrangements are netted against the commission revenues. Research receivable, including prepaid research on behalf of customers and balance transfers due from other broker-dealers, net of an allowance is included in Receivables from customers and Receivables from broker-dealers and clearing organizations, while accrued research payable is included in Accounts payable, accrued expenses, and other liabilities in the Condensed Consolidated Statements of Financial Condition.

Property Equipment and Occupancy

Equipment


Property and equipment are carried at cost, less accumulated depreciation, except for the assets acquired in connection with acquisitions using the acquisitions of MTH and KCG,purchase accounting method, which were recorded at fair value on the respective datesdate of the acquisitions. Depreciation is provided using the straight-line method over estimated useful lives of the underlying assets. Routine maintenance, repairs and replacement costs are expensed as incurred and improvements that appreciably extend the useful life of the assets are capitalized. When property and equipment are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income. Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. Furniture, fixtures, and equipment are depreciated over three to seven years. Leasehold improvements are amortized over the lesser of the life of the improvement or the term of the lease.

The Company recognizes rent expense under operating leases with fixed rent escalations, lease incentives and free rent periods on a straight-line basis over the lease term beginning on the date the Company takes possession


15
Table of or controls the use of the space, including during free rent periods.

Lease Loss Accrual

The Company’s policy is to identify excess real estate capacity and where applicable, accrue for related future costs, net of projected sub-lease income upon the date the Company ceases to use the excess real estate, which is recorded under operating and administrative in the condensed consolidated statements of comprehensive income (loss). Such accrual is adjusted to the extent the actual terms of sub-leased property differ from the previous assumptions used in the calculation of the accrual.

Contents

Capitalized Software


The Company capitalizes costs of materials, consultants, and payroll and payroll related costs for employees incurred in developing internal-use software.software and software to be sold, leased, or marketed. Costs incurred during the preliminary project and post-implementation stages are charged to expense.


Management’s judgment is required in determining the point at which various projects enter the stages at which costs may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining the estimated useful lives over which the costs are amortized.


Capitalized software development costs and related accumulated amortization are included in property,Property, equipment and capitalized software in the accompanying condensed consolidated statementsCondensed Consolidated Statements of financial conditionFinancial Condition and are amortized over a period of 1.41.5 to 3 years, which represents the estimated useful lives of the underlying software.


Leases

The Company determines if an arrangement is a lease at the inception of the arrangement. Operating leases are included in Operating lease right-of-use ("ROU") assets and Operating lease liabilities on the Condensed Consolidated Statements of Financial Condition. Operating lease ROU assets are assets that represent the lessee’s right to use, or control the use of, a specified asset for the lease term. Finance leases consist primarily of leases for technology and equipment and are included in Property, equipment, and capitalized software and Accounts payable, accrued expenses and other liabilities on the Condensed Consolidated Statements of Financial Condition. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The Company uses its incremental borrowing rate, based on the information available at the commencement date of the lease, in determining the present value of future payments. The ROU assets are reduced by lease incentives and initial direct costs incurred. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases and amortization of the finance lease ROU asset is recognized on a straight-line basis over the lease term. Lease expense related to the leasing of corporate office space is recorded in Operations and Administrative expenses on the Condensed Consolidated Statement of Comprehensive Income. Lease expense related to the leasing of data centers and other technology is recorded in Communication and Data Processing on the Condensed Consolidated Statement of Comprehensive Income. Certain of the Company's lease agreements contain fixed lease payments that contain lease and non-lease components; for such leases, the Company accounts for the lease and non-lease components as a single lease component. The Company nets its sublease income against corresponding lease expenses within Operations and Administrative expenses on the Condensed Consolidated Statement of Comprehensive Income.

Goodwill


Goodwill represents the excess of the purchase price over the underlying net tangible and intangible assets of the Company’s acquisitions. Goodwill is not amortized but is testedassessed for impairment on an annual basis and between annual testsassessments whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is testedassessed at the reporting unit level, which is defined as an operating segment or one level below the operating segment.


The Company testsassesses goodwill for impairment on an annual basis on July 1 and on an interim basis when certain events occur or certain circumstances exist. In the impairment testassessment as of July 1, 2017,2020, the primary valuation method used to estimateCompany assessed qualitative factors as described in ASC 350-20 for each of its reporting units for any indicators that the fair valuevalues of the Company’s reporting unitunits were less than their carrying values. NaN impairment was the market capitalization approach based on the market price of its Class A common stock, which the Company’s management believes to be an appropriate indicator of its fair value.

identified.


Intangible Assets


The Company amortizes finite-lived intangible assets over their estimated useful lives. Finite-lived intangible assets are tested for impairment annually or when impairment indicators are present, and if impaired, they are written

11

Table of Contents

down to fair value.


Exchange Memberships and Stock


Exchange memberships are recorded at cost or, if any other than temporary impairment in value has occurred, at a value that reflects management’s estimate of fair value. Exchange memberships acquired in connection with the Acquisition of KCG were recorded at their fair valuevalues on the datedates of acquisition. Exchange stock includes shares that entitle the Company to certain trading privileges. Exchange Stock is marked to market with the corresponding gain or loss recorded under operating and administrative in the condensed consolidated statements

16
Table of comprehensive income (loss). The Company’s exchange memberships and stock are included in other assets in the condensed consolidated statements of financial condition.

Contents

Trading Income, net


Trading income, net is comprisedcomposed of changes in the fair value of trading assets and liabilities (i.e., unrealized gains and losses) and realized gains and losses on trading assets and liabilities. Trading gains and losses on financial instruments owned and financial instruments sold, not yet purchased are recorded on the trade date and reported on a net basis in the condensed consolidated statementsCondensed Consolidated Statements of comprehensive income (loss).

Comprehensive Income.


Commissions, net and Technology Services


Commissions, net, which primarily comprise commissions and commission equivalents earned on institutional client orders, are recorded on a trade date basis. Under a commission management program, the Company allows institutional clients to allocate a portion of their gross commissions to pay for research and other services provided by third parties. As the Company acts as an agent in these transactions, it records such expenses on a net basis within Commissions, net and technology services in the condensed consolidated statementsCondensed Consolidated Statements of comprehensive income (loss).

TechnologyComprehensive Income. The Company recognizes the related revenue when the third-party research services are rendered and payments are made to the service provider.


The Company provides order management software (“OMS”) and related software products and connectivity services to customers and recognizes license fee revenues consist of technology licensing fees and agency commissionmonthly connectivity fees. Technology licensing fees are earned from third partiesLicense fee revenues, generated for licensingthe use of the Company’s proprietary risk managementOMS and trading infrastructure technologyother software products, is fixed and recognized at the provisionpoint in time at which the customer is able to use and benefit from the license. Connectivity revenue is variable in nature, based on the number of associated managementlive connections, and hosting services. These fees include both upfront and annual recurring fees. Revenue from technology services is recognized once persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable. Revenue is recognized ratably over the contractual service period.

Soft Dollar Expense

Under a commission management program, the Company allows institutional clients to allocate a portion of their gross commissions to pay for research and other services provided by third parties. As the Company acts as an agent in these transactions, it records such expensestime on a netmonthly basis within commissionsusing a time-based measure of progress.


The Company also provides analytics products and technologyservices to customers and recognizes subscription fees, which are fixed for the contract term, based on when the products and services are delivered. Analytics products and services may be bundled with trade execution services, in which case commissions are allocated to the condensed consolidated statements of comprehensive income (loss).

analytics performance obligations using an allocation methodology.


Interest and Dividends Income/Interest and Dividends Expense


Interest income and interest expense are accrued in accordance with contractual rates. Interest income consists of interest earned on collateralized financing arrangements and on cash held by brokers. Interest expense includes interest expense from collateralized transactions, margin and related lines of credit. Dividends on financial instruments owned including those pledged as collateral and financial instruments sold, not yet purchased are recorded on the ex-dividend date and interest is recognized on an accrual basis.


Brokerage, Exchange, and Clearance Fees and Payments for Order Flow, Net


Brokerage, exchange, and clearance fees and payments for order flow, net, comprise the costs of executing and clearing trades and are recordedaccrued on a trade date basis. Rebatesbasis in the Condensed Consolidated Statements of Comprehensive Income. These costs are net of rebates, which consist of volume discounts, credits or payments received from exchanges or other market places related to the placement and/or removal of liquidity from the order flow in the marketplace. Rebates are recorded on an accrual basis and included net within brokerage, exchange and clearance fees in the accompanying

12

Table of Contents

condensed consolidated statements of comprehensive income (loss).

Payments for Order Flow

basis. Payments for order flow represent payments to broker-dealer clients, in the normal course of business, for directing their order flow in U.S. equities to the Company. Payments for order flow are recorded on a trade-date basis in the condensed consolidated statements of comprehensive income (loss).

Payable to customers

Payable to customers arises primarily from securities transactions and includes amounts due on receive versus payment (“RVP”) or deliver versus payment (“DVP”) transactions. Due to their short-term nature, such amounts approximate fair value.


Income Taxes

Subsequent to consummation of the Reorganization Transactions and the IPO, the


The Company is subject to U.S. federal, state and local income taxes on its taxable income. The Company’sCompany's subsidiaries are subject to income taxes in the respective jurisdictions (including foreign jurisdictions) in which they operate. Prior to the consummation of the Reorganization Transactions and the IPO, no provision for United States federal, state and local income tax was required, as Virtu Financial is a limited liability company and is treated as a pass-through entity for United States federal, state, and local income tax purposes.


The provision for income tax is comprised ofcomprises current tax and deferred tax. Current tax represents the tax on current year tax returns, using tax rates enacted at the balance sheet date. The deferred tax assets are recognized in full and then reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be recognized.


The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the applicable taxing authority, including resolution of the appeals or litigation processes, based on the technical merits of the position. The tax benefits recognized in the condensed consolidated financial statements from such a position are measured based on the largest benefit for each such position that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Many factors are considered when evaluating and estimating the tax positions and tax benefits. Such estimates involve interpretations of regulations, rulings, case law, etc. and are inherently
17
Table of Contents
complex. The Company’s estimates may require periodic adjustments and may not accurately anticipate actual outcomes as resolution of income tax treatments in individual jurisdictions typically would not be known for several years after completion of any fiscal year. The Company had $8.0 million of unrecognized tax benefits as of September 30, 2017 from the KCG acquisition. The Company has determined that there are no uncertain tax positions that would have a material impact on the Company’s financial position as of December 31, 2016.

As a result of the acquisition of KCG, the Company acquired a deferred tax asset of $31.5 million relating to non-U.S. net operating losses.  A full valuation allowance was also recorded against this deferred tax asset at September 30, 2017 as it is more likely than not that this deferred tax asset will not be realized.  

No valuation allowance against deferred taxes was recorded at December 31, 2016 because at that point it was estimated to be more likely than not that the deferred tax asset recorded as of that date would be fully realized.


Comprehensive Income (Loss) and Foreign Currency Translation


Comprehensive income (loss) consists of two components: net income (loss) and other comprehensive income (loss) (“OCI”). OCI is comprised of revenues, expenses, gains and losses that are reported in the comprehensive income (loss) section of the condensed consolidated statements of comprehensive income, but are excluded from reported net income (loss). The Company’s OCI is comprised ofcomprises foreign currency translation adjustments. adjustments and mark-to-market gains and losses on the Company's derivative instruments designated as hedging instruments under ASC 815.

Assets and liabilities of

13

Table of Contents

operations having non-U.S. dollar functional currencies are translated at period-end exchange rates, and revenues and expenses are translated at weighted average exchange rates for the period. Gains and losses resulting from translating foreign currency financial statements, net of related tax effects, are reflected in accumulatedAccumulated other comprehensive income, (loss), a separate component of stockholders’ equity.

The Company's foreign subsidiaries generally use the U.S. dollar as their functional currency. The Company also has subsidiaries that utilize a functional currency other than the U.S. dollar, primarily comprising its Irish subsidiaries domiciled in Ireland, which utilizesutilize the Euro and Pound Sterling as the functional currency.

Assetscurrency, and liabilities of non-U.S.subsidiaries domiciled in Canada, which utilize the Canadian dollar as the functional currency subsidiaries are translated atcurrency.


The Company may use derivative instruments for risk management purposes, including cash flow hedges used to manage interest rate risk on long-term borrowings and net investment hedges used to manage foreign exchange rates atrisk. For instruments that meet the end of a period. Revenues and expenses are translated at average exchange rates during the period. Gains andcriteria to be considered hedging instruments under ASC 815, any gains or losses resulting from translating foreign currency financial statements into U.S. dollars are included in Accumulated other comprehensive (loss) income on the condensed consolidated statementsCondensed Consolidated Statements of financial conditionFinancial Condition and cumulative translation adjustment, net of taxOther comprehensive income on the condensed consolidated statementsCondensed Consolidated Statements of comprehensive income (loss).

The Company may seek to reduce the impact of fluctuations in foreign exchange rates on its net investment in certain non-U.S. operations through the use of foreign currency forward contracts. For foreign currency forward contracts designated as hedges, the Company assesses its risk management objectives and strategy, including identification of the hedging instrument, the hedged item and the risk exposure and how effectiveness is to be assessed prospectively and retrospectively. The effectiveness of the hedge is assessed based on the overall changes in the fair value of the forward contracts. For qualifying net investment hedges, any gains or losses,Comprehensive Income, to the extent effective,they are included in Accumulated other comprehensive (loss) income on the condensed consolidated statements of financial condition and Cumulative translation adjustment, net of tax, on the condensed consolidated statements of comprehensive income (loss). The ineffective portion, if any, is recorded in Investment income and other, net on the condensed consolidated statements of operations.

effective.


Share-Based Compensation

The fair value of awards issued for compensation prior to the Reorganization Transactions and the IPO was determined by management, with the assistance of an independent third party valuation firm, using a projected annual forfeiture rate, where applicable, on the date of grant.


Share-based awards issued for compensation in connection with or subsequent to the Reorganization TransactionCompany's initial public offering in April 2015 (the “IPO”) and certain reorganization transactions consummated in connection with the IPO (the “Reorganization Transactions”) pursuant to the VFIVirtu Financial, Inc. 2015 Management Incentive Plan (the “2015(as amended, the “Amended and Restated 2015 Management Incentive Plan”) wereand pursuant to the Amended and Restated Investment Technology Group, Inc. 2007 Omnibus Equity Compensation Plan, dated as of June 8, 2017 (the “Amended and Restated ITG 2007 Equity Plan”), are in the form of stock options, Class A common stock, par value $0.00001 per share (the “Class A Common Stock”), RSAs and (restricted stock units (“RSUs”).RSUs, as applicable. The fair value of the stock option grants is determined through the application of the Black-Scholes-Merton model. The fair valuevalues of the Class A common stockCommon Stock and RSUs are determined based on the volume weighted average price for the three days preceding the grant, and withgrant. With respect to the RSUs, a projected annual forfeiture rate.forfeitures are accounted for as they occur. The fair value of RSAs is determined based on the closing price as of the grant date. The fair value of share-based awards granted to employees is expensed based on the vesting conditions and areis recognized on a straight-line basis over the vesting period, or, in the case of RSAs subject to performance conditions, from the date that achievement of the performance target becomes probable through the remainder of the vesting period. The Company records as treasury stock shares repurchased from its employees for the purpose of settling tax liabilities incurred upon the issuance of common stock,Class A Common Stock, the vesting of RSUs or the exercise of stock options.


Variable Interest Entities


A variable interest entity (“VIE”) is an entity that lacks one or more of the following characteristicscharacteristics: (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity.


The Company will be considered to have a controlling financial interest and will consolidate a VIE if it has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

14


Table of Contents

In October 2016, theThe Company investedhas interests in a2 joint ventureventures (“JV”) with nine other parties. One of the parties was KCG.  Upon the Merger, KCG was required to relinquish their ownership in the JV.  As of September 30, 2017, each of the remaining parties owns approximately 11% of the voting sharesthat build and 11% of the equity of this JV, which is buildingmaintain microwave communication networks in the U.S. and Asia, and which is considered to be a VIE. The Company and all of its JV partners each pay monthly fees for the funding of the construction of the microwave communication networks. When completed, this JV may sell excess bandwidth that is not utilized by its joint venture members to third parties.

As a result of the Acquisition, the Company owns 50% of the voting shares and 50% of the equity of a JV which maintains microwave communication networks in the U.S. and, Europe, and which is considered to be a VIE.Asia. The Company and its JV partnerpartners each pay monthly fees for the use of the microwave communication networks in connection with their respective trading activities, and the JVJVs may sell excess bandwidth that is not utilized by the JV members to third parties.

 As of September 30, 2020, the Company held noncontrolling interests of 10% and 50%, respectively, in these JVs.


18
Table of Contents
The Company has an interest in a JV that offers derivatives trading technology and execution services to broker-dealers, professional traders and select hedge funds. As of September 30, 2020, the Company held approximately a 10% noncontrolling interest in this JV.

The Company has an interest in a JV that is developing a member-owned equities exchange with the goal of increasing competition and transparency, while reducing fixed costs and simplifying execution of equity trading in the US. As of September 30, 2020, the Company held approximately a 14.1% noncontrolling interest in this JV.

The Company's 4 JVs meet the criteria to be considered VIEs. In each of the JVs, the Company does not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; therefore it does not have a controlling financial interest in the JV and does not consolidate the JVs. The Company records its interest in each JV under the equity method of accounting and records its investment in the JVs within Other assets and its amounts payable for communication services provided by the JV within AccruedAccounts payable, accrued expenses and other liabilities on the condensed consolidated statementsCondensed Consolidated Statements of financial condition.Financial Condition. The Company records its pro-rata share of the JVseach JV's earnings or losses within Other, net and fees related to the use of communication services provided by the JVs within Communications and data processing on the condensed consolidated statementsCondensed Consolidated Statements of comprehensive income (loss).

Comprehensive Income.


The Company’s exposure to the obligations of these VIEVIEs is generally limited to its interests in each respective JV, which is the carrying value of the equity investment in each JV.


The following table presents the Company’s nonconsolidated VIEVIEs at September 30, 2017:

2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maximum

 

 

 

 

 

Carrying Amount

 

 

Exposure to

 

 

 

 

 Carrying AmountMaximum Exposure to LossVIEs' assets

(in thousands)

 

Asset

 

Liability

 

 

loss

 

 

VIE's assets

 

(in thousands)AssetLiability

Equity investment

 

$

15,925

 

$

 —

 

$

15,925

 

$

40,925

 

Equity investment$31,683 $0 $31,683 $185,931 

Recent

The following table presents the Company’s nonconsolidated VIEs at December 31, 2019: 
Carrying AmountMaximum Exposure to LossVIEs' assets
(in thousands)AssetLiability
Equity investment$28,579 $0 $28,579 $119,051 


Accounting Pronouncements,

Revenue Recently Adopted


Fair Value Measurement- In May 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015,2018, the FASB issued ASU 2015-14, Revenue from Contracts with Customers2018-13, Fair Value Measurement (Topic 606)820): DeferralDisclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modified the disclosure requirements on fair value measurements in ASC Topic 820, Fair Value Measurement. Disclosure requirements were eliminated for the amount of and reasons for transfers between Level 1 and Level 2 of the Effective Date.fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. Disclosure requirements were modified for liquidation of investments in certain entities that calculate net asset value, and for measurement uncertainty disclosures. Disclosure requirements were added for changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company adopted this ASU 2015-14 deferson January 1, 2020. The updated disclosures are included in Note 11 “Financial Assets and Liabilities”.

Consolidation - In October 2018, the effective date of ASU 2014-09 by one year for public companies. ASU 2015-14 applies to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. In December 2016, FASB issued ASU 2016-20 Technical Correction and Improvement2018-17, Consolidation (Topic 606)810): Revenue from Contracts with CustomersTargeted Improvements to Related Party Guidance for Variable Interest Entities, which amendsmodified how VIEs are assessed for consolidation purposes under ASC Topic 810, Consolidation. Under the guidanceupdate, indirect interests held through related parties in ASU 2014-09. The effective datecommon control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and transition requirements for the ASUservice providers are the same as ASU 2014-09.variable interests. The Company is expected to adopt the revenue recognition guidanceadopted this ASU on January 1, 2018 by applying the full retrospective method. Because the guidance does2020, and it did not apply to revenue associated with securities trading activities that are accounted for under other GAAP, the Company  does not expect the guidance to have a material impact on its condensed consolidated statementsfinancial statements.

Measurement of comprehensive income (loss) most closely associated with financial instruments, including Trading revenues, net, Commissions and technology services, and Interest and dividends income. The Company’s implementation efforts include the identification of revenue within the scope of the guidance and the evaluation of certain revenue contracts. The Company’s evaluation of the impact of the new guidanceCredit Losses on its condensed consolidated financial statements is ongoing, and it continues to evaluate the timing of recognition for various revenues, including soft

15

Table of Contents

dollar related activity, which may be impacted depending on the features of the client arrangements and the presentation of certain contract costs (whether presented gross or offset against revenues). Also, the Company will identify performance obligations under ASC Topic 606 related to its technology licensing agreements. The timing of revenue recognition may be accelerated under the new standard, however the net impact is estimated to be immaterial based on contracts in place as of September 30, 2017.

Financial Assets and Liabilities —Instruments - In JanuaryJune 2016, the FASB issued ASU 2016-01, 2016-13, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement- Credit Losses (Topic 326) -Measurement of Credit Losses on Financial Assets and Financial LiabilitiesInstruments. TheThis ASU intends to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information and addresses certainamends several aspects of the recognition, measurement presentation,of credit losses on financial instruments, including replacing the existing incurred credit loss model and disclosure of financial instruments. The new ASU affects all entities that holdother models with the Current Expected Credit Losses model (“CECL”). Under CECL, the allowance for losses for financial assets that are measured at amortized cost reflects management’s estimate of credit losses over the remaining expected life of the financial assets. Expected credit losses for newly recognized financial assets, as well as changes to expected credit

19
Table of Contents
losses during the period, would be recognized in earnings, and adoption of the ASU will generally result in earlier recognition of credit losses. Expected credit losses will be measured based on historical experience, current conditions and forecasts that affect the collectability of the reported amount, and credit losses will be generally recognized earlier than under previous U.S. GAAP.

The Company adopted this ASU on January 1, 2020 using the modified retrospective method of adoption. The ASU impacts only those financial instruments that are carried by the Company at amortized cost such as collateralized financing arrangements (repurchase agreements and securities borrowing/ lending transactions) and receivables from customers, broker-dealers and clearing organizations. The adoption of this ASU did not have a material impact to the Company's financial condition, results of operations or owe financialcash flows.

Accounting Pronouncements, Not Yet Adopted as of September 30, 2020

Income Taxes - In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. The ASU also amends other aspects of the guidance relating to the accounting for franchise taxes, enacted changes in tax laws or rates, the accounting for transactions that result in a step-up in the tax basis of goodwill, and other tax-related items. The ASU is effective for annual reporting periods (including interim periods) beginning after December 15, 2017. Early2020, including interim periods within that fiscal year; early adoption ofis permitted. Most amendments within the ASU is not permitted, except for theare required to be applied on a prospective basis, while certain amendments relating to the presentation of the change in the instrument-specific credit risk relating tomust be applied on a liability that an entity has elected to measure at fair value.retrospective or modified retrospective basis. The Company is currently evaluating the potential effectsimpact of the adoption of ASU 2016-01new standard on its condensed consolidated financial statements,Condensed Consolidated Financial Statements and related disclosures.

Reference Rate Reform - In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which is designed to ease the potential burden in accounting for the transition away from LIBOR. The ASU applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued and replaced with alternative reference rates as a result of reference rate reform. The ASU provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is evaluating the impact of the ASU, but does not expect it to have a material impact on its condensed consolidated financial statements, as it does not currently classify any equity securities as available for sale,Condensed Consolidated Financial Statements and it does not apply the fair value option to its own debt issuances.

Leases —related disclosures.


Convertible Instruments - In February 2016,August 2020, the FASB issued ASU 2016-02, Leases (Topic 842)2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). Under the new ASU, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. The liability will be equal to the present value of lease payments. The asset, referred to as a “right-of-use asset” will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, leases will be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. New quantitative and qualitative disclosures, including significant judgments made by management, will be required to provide greater information regarding the extent of revenue and expense recognized and expected to be recognized from existing contracts.  The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company anticipates adopting this ASU on January 1, 2019. The Company is not anticipating recognizing lease assets and lease liabilities for leases with a term of twelve months or less. As of September 30, 2017, the Company has not yet identified any significant changes in the timing of operating leases recognition when considering this ASU, but the Company’s implementation efforts are ongoing and such assessments may change prior to the January 1, 2019, anticipated implementation date. Upon adoption of this ASU, the Company expects to report increased assets and liabilities on its condensed consolidated statement of financial condition as a result of recognizing right-of-use assets and lease liabilities related to certain equipment under noncancelable operating lease agreements, which currently are not reflected in its condensed consolidated statement of financial condition.

Statement of Cash Flows – In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.The ASU intended to reduce diversitysimplifies accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in practice how certain transactions are classified in the statement of cash flows by mandating classification of certain activities. an entity's own equity and updates selected EPS guidance. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods.  Early adoption is permitted.  An entity that elects early adoption must adopt all of the amendments in the same period.2021. The Company is currently evaluating the potential effects of adoption of ASU 2016-15 on the Company’s condensed consolidated financial statements.

Income Taxes – In October 2016, FASB issued ASU 2016-16, Income Taxes (Topic 749): Intra-Entity Transfers of Assets Other Than Inventory. The ASU requires the reporting entity to recognize the tax expense from the sale of an asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effectsimpact of the transactions are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The ASU is effective for annual periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the potential effects of adoption of ASU 2016-16 on the Company’s condensed consolidated financial statements.

16

Table of Contents

Restricted cash – In November 2016, FASB issued ASU 2016-18, Statement of Cash Flow (Topic 230): Restricted Cash, which is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalent in the statements. The statement requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company has elected to early adopt this ASU effective as June 30, 2017.

Accounting Changes – In January 2017, FASB issued ASU 2017-03, Accounting Changes and Error Correction (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323),which amends SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC update). The SEC staff view is that a registrant should evaluate the impact of new accounting standards that have not yet been adopted to determine the appropriate financial disclosures on the potential material effects, especially on new standards on revenue recognition, leases, and financial instruments – credit losses. If a registrant cannot reasonably estimate the impact that adoption of the ASUs, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact. Additional qualitative disclosures should include a description of the effect of the accounting policies expected to be applied compared to current accounting policies. Furthermore, the registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. The Company adopted this ASU on January 1, 2017, and appropriate disclosures have been included in this Note for each recently issued accounting standard.

Goodwill - In January, 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment.  To simplify the subsequent measurement of goodwill, this ASU eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.  This ASU is effective for public entities in fiscal years beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of this ASU to have a material impactstandard on its condensed consolidated financial statements.

Business Combinations -Condensed Consolidated Financial Statements and related disclosures.


3. ITG Acquisition

Background

On the ITG Closing Date, the Company completed the ITG Acquisition. In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business,  to  amend the definition of a businessconnection with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU is effective for reporting periods beginning after December 15, 2017. The impact of this ASU will depend on the nature of the Company’s activities after adoptionITG Acquisition, Virtu Financial, VFH Parent LLC, a Delaware limited liability company and the Company does not expect the adoption of this ASU to have a significant impact on its condensed consolidated financial statements. The Company is currently evaluating the potential effects of adoption of ASU 2017-01 on the Company’s condensed consolidated financial statements.

3. Mergersubsidiary of Virtu Financial Inc.(“VFH”) and KCG Holdings, Inc.

Background

AsImpala Borrower LLC (the “Acquisition Borrower”), a subsidiary of the Company, entered into a Credit Agreement dated as of March 1, 2019 (as amended from time to time, the “Credit Agreement”), with the lenders party thereto, Jefferies Finance LLC, as administrative agent and Jefferies Finance LLC and RBC Capital Markets, as joint lead arrangers and joint bookrunners. The Credit Agreement provided (i) a senior secured first lien term loan in an aggregate principal amount of $1,500.0 million, drawn in its entirety on the ITG Closing Date, with approximately $404.5 million borrowed by VFH to repay all amounts outstanding under its existing term loan facility and the remaining approximately $1,095.0 million borrowed by the Acquisition Borrower to finance the consideration and fees and expenses paid in connection with the ITG Acquisition, and (ii) a $50.0 million senior secured first lien revolving facility to VFH, with a $5.0 million letter of credit subfacility and a $5.0 million swingline subfacility. After the closing of the ITG Acquisition, VFH assumed the obligations of the Acquisition eachBorrower in respect of KCG’s issued and outstanding shares of Class A common stock, par value $0.01 per share were cancelled and extinguished and converted into the right to receive $20.00 in cash, without interest, less any applicable withholding taxes.acquisition term loans. The acquisition of KCG is being accounted forCredit Agreement was subsequently amended as a business combination, subject to the provisions of ASC 805, Business Combinations.

17

Table of Contents

As discussed indescribed further detail in Note 910 “Borrowings”,. Additionally, on June 30, 2017, Virtu Financial and VFH entered into athe ITG Closing Date, the Company’s fourth amended and restated credit agreement (the(as amended on January 2, 2018 and September 19, 2018, the “Fourth Amended and Restated Credit Agreement”) with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, sole lead arranger and bookrunner, which amended and restated in its entirety the existing Credit Agreement.  The Fourth Amended and Restated Credit Agreement provided for a $540.0 million first lien secured term loan, drawn in its entirety on June 30, 2017, and continued VFH’s existing $100.0 million first lien senior secured revolving credit facility.  Also on June 30, 2017, Orchestra Borrower LLC (the “Escrow Issuer”), a wholly owned subsidiary of the Company, entered into an escrow credit agreement (the “Escrow Credit Agreement”) with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, sole lead arranger and bookrunner, which provided for a $610.0 million term loan (the “Escrow Term Loan”), the proceeds of which were deposited into escrow pending the closing of the Acquisition.  

Upon the closing of the Acquisition, the proceeds of the Escrow Term Loan were released to fund in part the Acquisition consideration, the obligations of the Escrow Issuer in respect of the Escrow Term Loan were assumed by VFH Parent and the Escrow Term Loan was deemed to be outstanding under the Fourth Amended and Restated Credit Agreement and the Escrow Credit Agreement and related credit documents automatically terminated and were superseded by the provisions of the Fourth Amended and Restated Credit Agreement.  In addition, the revolving credit facility under the Fourth Amended and Restated Credit Agreement terminated.

On June 16, 2017, the Escrow Issuer and Orchestra Co-Issuer, Inc. (the “Co-Issuer”) completed the offering of $500 million aggregate principal amount of 6.750% Senior Secured Second Lien Notes due 2022 (the “Notes”). The Notes were issued under an Indenture, dated June 16, 2017 (the “Indenture”), among the Escrow Issuer, the Co-Issuer and U.S. Bank National Association, as trustee and collateral agent. The Notes mature on June 15, 2022. Interest on the Notes accrues at 6.750% per annum, payable every six months through maturity on each June 15 and December 15, beginning on December 15, 2017.

On July 20, 2017, VFH assumed all of the obligations of the Escrow Issuer under the Indenture and the Notes. The Notes are guaranteed by Virtu Financial and each of Virtu Financial’s wholly-owned domestic restricted subsidiaries that guarantees the Fourth Amended and Restated Credit Agreement, including KCG and certain of its subsidiaries and the Escrow Issuer. We refer to VFH and the Co-Issuer together as, the “Issuers.”

On the Closing Date, the Escrow Credit Agreement and related credit documents automatically ceased to be of force or effect and were superseded by the provisions of the Fourth Amended and Restated Credit Agreement and the first lien senior secured revolving credit facility matured. A total of $1,119.4 million restricted cash in escrow was released to the Company.

On the Closing Date, and in connection with the financing of the Acquisition, the Company issued to Aranda Investments Pte. Ltd. (“Aranda”), an affiliate of Temasek Holdings (Private) Limited (“Temasek”), 6,346,155 shares of the Company’s Class A common stock, pursuant to the investment agreement with Aranda (as amended, the “Aranda Investment Agreement”) in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) of the Securities Act for an aggregate purchase price of approximately $99.0 million. On August 10, 2017, the Company issued an additional 1,666,666 shares of its Class A common stock for an aggregate purchase price of $26.0 million (collectively, the “Temasek Investment”).

On the Closing Date, and in connection with the financing of the Acquisition, the Company issued to North Island Holdings I, LP (“NIH”) 39,725,979 shares of the Company’s Class A pursuant to the investment agreement with NIH (as amended, the “NIH Investment Agreement”) in a private placement exempt from the registration requirements of the Securities Act pursuant to Section 4(a) (2) of the Securities Act for an aggregate purchase price of approximately $613.5 million. On August 10, 2017 the Company issued an additional 338,124 shares of its Class A common stock for an aggregate purchase price of $5.2 million (collectively, the “NIH Investment”). In connection with the Temasek Investment and NIH Investment, the Company incurred approximately $7.8 million in fees which were recorded as a reduction to additional paid-in capital.

18

20
Table of Contents

On July 21, 2017, the outstanding 6.875% Senior Secured Notes due 2020 issued by KCG were redeemed at a redemption price equal to 103.438% of the principal amount, plus accrued and unpaid interest, pursuant to the indenture, dated as of March 13, 2015 (as amended, restated, supplemented or otherwise modified), by and among KCG, the subsidiary guarantors party thereto and The Bank of New York Mellon, as trustee and collateral agent.

In accordance with the terms of the Fourth Amended and Restated Credit Agreement, VFH made voluntary prepayments of principal under the Term Loan Facility in the amount of $100.0 million each, on August 8, 2017 and September 29, 2017, respectively. The outstanding principal amount under the Term Loan Facility was $950.0 million as of September 30, 2017.


Accounting treatment of the ITG Acquisition


The ITG Acquisition ishas been accounted for as a purchase of KCGbusiness combination pursuant to ASC 805, Business Combinations by the Company.Company using the acquisition method of accounting. Under the acquisition method, of accounting, the assets and liabilities of KCG,ITG, as of July 20, 2017,the ITG Closing Date, were recorded at their respective fair values and added to the carrying value of the Company's existing assets and liabilities. These fair values were determined with the assistance of third party valuation professionals.  The reported financial condition and results of operations of the Company for the periods following the MergerITG Closing Date reflect KCG'sITG's and the Company's balances and reflect the impact of purchase accounting adjustments. As the Company is the accounting acquirer, the financial results for the three and nine months ended September 30, 20172019 comprise the results of the Company for the entire applicable period and the results of KCGITG from the ITG Closing Date through September 30, 2017.2019. All periods prior to 2017the ITG Closing Date comprise solely the results of the Company.


Certain former KCGITG management employees were terminated upon the Merger,ITG Acquisition, and as a result were paid an aggregate of $6.4$17.6 million pursuant to their existing employment contracts.contracts and arrangements. This amount has been recognized as an expense by the Company and is included in Employee compensation and payroll taxes in the condensed consolidated statementsCondensed Consolidated Statements of comprehensive income (loss)Comprehensive Income for the three and nine month periods ending September 30, 2017.  The Company also expects to make annual incentive compensation payments to former KCG employees who became employees of the Company following the Merger, and accrued related compensation expense of approximately $23.0 million during the three and nine months ended September 30, 2017, which is included in Employee compensation and payroll taxes in the condensed consolidated statements of comprehensive income (loss).

2019.


Purchase price and goodwill


The aggregate cash purchase price of $1.40approximately $1.0 billion was determined as the sum of the fair value, at $20.00$30.30 per share, of KCGITG shares and warrants outstanding toheld by former KCGITG stockholders at closing and the fair value of KCGcertain ITG employee stock basedstock-based awards that were outstanding, and which vested at the ITG Closing Date.


The purchase price has beenwas allocated to the assets acquired and liabilities assumed using their estimated fair values at July 20, 2017, the closing date of the Acquisition.ITG Closing Date. The Company has not yet completed all of its analyses to finalize the allocation of the purchase price to the KCG acquired assets and liabilities. The allocation of the purchase price may be modified over the measurement period, as more information is obtained about the fair values of assets acquired and liabilities assumed. The Company has engaged third party specialists for the purchase price allocation.

The amounts in the table below represent the allocation of the purchase price and are subject to revision during the remainder of the measurement period, a period not to exceed twelve months from the Acquisition date. Adjustments to the provisional values during the measurement period will be recorded in the reporting period in which the adjustment amounts are determined. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Acquisition date:

 

 

 

 

 

(in thousands)

 

 

 

 

Cash and equivalents

 

$

592,993

 

Cash and securities segregated under federal regulations

 

 

3,000

 

Securities borrowed

 

 

1,406,444

 

19


Table of Contents

Securities purchased under agreements to resell

 

 

16,894

 

Receivables from broker dealers and clearing organizations

 

 

553,031

 

Financial instruments owned, at fair value

 

 

2,095,339

 

Property, equipment and capitalized software (net)

 

 

112,204

 

Intangibles

 

 

156,300

 

Deferred taxes

 

 

22,928

 

Other assets                                                 

 

 

331,820

 

Total Assets

 

$

5,290,953

 

 

 

 

 

 

Securities loaned

 

$

166,189

 

Securities sold under agreements to repurchase

 

 

841,606

 

Payables to broker dealers and clearing organizations

 

 

536,653

 

Payables to customers

 

 

17,583

 

Financial instruments sold, not yet purchased, at fair value

 

 

1,756,647

 

Accounts payable and accrued expenses and other liabilities

 

 

239,004

 

Debt

 

 

480,987

 

Total Liabilities

 

$

4,038,669

 

 

 

 

 

 

Total identified assets acquired, net of assumed liabilities

 

$

1,252,284

 

 

 

 

 

 

Goodwill

 

$

143,012

 

 

 

 

 

 

Total Purchase Price

 

$

1,395,296

 

Amounts preliminarily allocated to intangible assets, the amortization period and goodwill were as follows

follows:

 

 

 

 

 

 

 

 

Amortization

 

 

Amount

 

Years

 

(in thousands)(in thousands)AmountAmortization
Years

Technology

$

67,800

 

1-6 years

 

Technology$76,000 5

Customer relationships

 

77,100

 

13 - 17 years

 

Customer relationships437,600 10

Trade names

 

5,000

 

10 years

 

Trade names3,600 3

Exchange memberships

 

6,400

 

Indefinite

 

Intangible assets

$

156,300

 

 

 

Intangible assets517,200 

Goodwill

 

143,012

 

 

 

Goodwill312,343 

Total

$

299,312

 

 

 

Total$829,543 

Of


The Company estimated the fair value of the intangible assets, which involved the use of significant estimates and assumptions with respect to the timing and amounts of revenue growth rates, customer attrition rates, future tax rates, royalty rates, contributory asset charges, discount rate and the resulting cash flows. The total Goodwill of $143.0$312.3 million $107.2 million has been assigned to the Market Making segment and $35.8 million has beenwas assigned to the Execution Services segment. Such goodwill is attributable to the expansion of productsproduct offerings and expected synergies of the combined workforce, products and technologies of the Company and KCG.

ITG.


Assumption of Equity Compensation Plan

On the ITG Closing Date, the Company assumed the Amended and Restated ITG 2007 Equity Plan and certain stock option awards, restricted stock unit awards, deferred stock unit awards and performance stock unit awards granted under the Amended and Restated ITG 2007 Equity Plan (the “Assumed Awards”). The Assumed Awards are subject to the same terms and conditions that were applicable to them under the Amended and Restated ITG 2007 Equity Plan, except that (i) the Assumed Awards relate to shares of the Company’s Class A Common Stock, (ii) the number of shares of Class A Common Stock subject to the Assumed Awards was the result of an adjustment based upon an Exchange Ratio (as defined in the Agreement and Plan of Merger by and between the Company, Impala Merger Sub, Inc., a Delaware corporation and an indirect wholly owned subsidiary of the Company, and ITG, dated as of November 6, 2018, the “ITG Merger Agreement”) and (iii) the performance share unit awards were converted into service-based vesting restricted stock unit awards that were no longer subject to any performance-based vesting conditions. As of the ITG Closing Date, the aggregate number of shares of Class A Common Stock subject to such Assumed Awards was 2,497,028 and the aggregate number of shares of Class A Common Stock that remained issuable pursuant to the Amended and Restated ITG 2007 Equity Plan was 1,230,406. The Company filed with the SEC a Registration Statement on Form S-8 on the ITG Closing Date to register such shares of Class A Common Stock.
21
Table of Contents

Tax treatment of the Merger

ITG Acquisition


The Company believes that theITG Acquisition will beis being treated as a tax-free transaction as described in Section 351 of the Internal Revenue Code, and both KCG and the Company have received tax opinions from external legal counsel to that effect.  KCG’sCode. ITG’s tax basis in its assets and liabilities therefore generally carriescarried over to the Company following the ITG Acquisition. None of the goodwill is expected to be deductible for tax purposes.


The Company recorded net deferred tax assets of $22.9$17.6 million and deferred tax liabilities of $71.1 million with respect to recording KCG’sITG’s assets and liabilities under the purchase method of accounting as described above as well as recording the value of other tax attributes acquired as a result of the ITG Acquisition, as described in Note 12.

14 “Income Taxes”.

20


Table4. Sale of Contents

MATCHNow

Pro forma results

IncludedIn May 2020, the Company entered into a Securities Purchase Agreement ("SPA") with Cboe Global Markets, Inc. (“CBOE”) pursuant to which the Company agreed to sell 100% of the outstanding interests in TriAct Canada Marketplace LP and TCM Corp., which operate an equities alternative trading system (“MATCHNow”) in Canada. Pursuant to the Company’s resultsterms of the SPA, the Company also agreed to enter into a licensing agreement for the three months ended September 30, 2017 are results from the business acquired as a resultlicensing of the Acquisition, from the datecertain software and intellectual property used in support of Acquisition, July 20, 2017 through September 30, 2017 as follows:

MATCHNow.

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

Revenues

 

$

149,327

 

Income (loss) before income taxes

 

 

(12,578)

 


The financial information in the table below summarizes the combined pro forma results of operations of

On August 4, 2020 (the "MATCHNow Closing Date"), the Company and KCG, based on addingcompleted the pre-tax historical resultssale of KCG and theMATCHNow to CBOE for total gross proceeds of $60.6 million in cash, with additional contingent consideration of up to approximately $23.0 million. The Company and adjusting primarily for amortization of intangibles created in the Acquisition, debt raised in conjunction with the Acquisition and nonrecurringincurred one-time transaction costs associated with the Acquisition, which comprise advisory and otherincluding professional fees incurred by Virturelated to the sale of $2.5 million, which were recorded in Transaction advisory fees and KCGexpenses on the Condensed Consolidated Statement of $24.2 and $22.5Comprehensive Income. The Company recognized a gain on sale of $56.2 million, respectively. The pro forma data assumes allwhich was recorded in Other, net on the Condensed Consolidated Statement of KCG’s issued and outstanding shares of Class A common stock, par value $0.01 per share were cancelled and extinguished and converted into the right to receive $20.00 in cash, without interest, less any applicable withholding taxes on January 1, 2016 and does not include adjustments to reflect the Company's operating costs or expected differences in the way funds generated by the Company are invested.

This pro forma financial information is based on estimates and assumptions that have been made solely for purposes of developing such pro forma information, including, without limitation, preliminary purchase accounting adjustments. The pro forma financial information does not reflect any synergies or operating cost reductions that may be achieved from the combined operations. The pro forma financial information combines the historical results for the Company and KCGComprehensive Income for the three and nine month periodsmonths ended September 30, 20172020.


A summary of the carrying value of MATCHNow and 2016 (in millions, except per share amounts):

gain on sale of MATCHNow is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

(in thousands, except per share amounts)

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

Revenue

 

$

304,020

 

$

373,338

 

$

1,068,164

 

$

1,401,819

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

(82,520)

 

 

1,783

 

 

(117,169)

 

 

163,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

 

(30,432)

 

 

658

 

 

(43,210)

 

 

60,165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

(0.35)

 

$

0.01

 

$

(0.48)

 

$

0.67

 

 


4.

(in thousands)
Total sale proceeds received$60,592 
Total carrying value of MATCHNow as of MATCHNow Closing Date(1,940)
Gain on sale of MATCHNow58,652 
Transaction costs(2,453)
Gain on sale of MATCHNow, net of transaction costs$56,199 

Contingent consideration will be earned based on the future performance of MATCHNow following the Closing Date. Deferred payments will be assessed quarterly until December 31, 2022 and recorded in Other, net on the Condensed Consolidated Statement of Comprehensive Income when the contingency is resolved and payments become payable by CBOE.
In addition, the Company entered into a Transition Services Agreement ("TSA") with CBOE, pursuant to which the Company agreed to provide certain telecom and general and administrative services for a defined period. Income from performing services under the TSA will be recorded in Other, net on the Condensed Consolidated Statement of Comprehensive Income.
With the licensing of certain software and intellectual property associated with MATCHNow, the Company performed an assessment of impairment of long-lived intangible assets acquired in connection with the ITG acquisition, of which MATCHNow technology was a component. NaN impairment was recognized for the three and nine months ended September 30, 2020.

22
Table of Contents
5. Earnings per Share

Net income (loss) available for common stockholders is based on the Company’s weighted average interest in Virtu Financial during the periods presented below.


The below table contains a reconciliation of net income (loss) before noncontrolling interest to net income (loss) available for common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  September 30,

 

Nine Months Ended  September 30,

 

(in thousands)

    

2017

    

2016

 

2017

    

2016

 

Income (loss) before income taxes and noncontrolling interest

 

$

(46,495)

 

$

37,874

 

$

(17,421)

 

$

140,990

 

Provision for (benefit from) income taxes

 

 

(6,505)

 

 

4,851

 

 

(2,918)

 

 

17,325

 

21

 Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2020201920202019
Income (loss) before income taxes and noncontrolling interest$252,515 $(5,828)$1,123,272 $(88,610)
Provision for (benefit from) income taxes52,807 (644)200,044 (14,322)
Net income (loss)199,708 (5,184)923,228 (74,288)
Noncontrolling interest(82,999)872 (386,311)33,412 
Net income (loss) available for common stockholders116,709 $(4,312)$536,917 $(40,876)

Table of Contents

Net income (loss)

 

 

(39,990)

 

 

33,023

 

 

(14,503)

 

 

123,665

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest

 

 

26,472

 

 

(25,997)

 

 

6,466

 

 

(97,913)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available for common stockholders

 

$

(13,518)

 

$

7,026

 

$

(8,037)

 

$

25,752

 

The calculation of basic and diluted earnings per share is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  September 30,

 

 

Nine Months Ended  September 30,

 

 

(in thousands, except for share or per share data)

    

2017

    

2016

 

    

2017

    

2016

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available for common stockholders

 

$

(13,518)

 

$

7,026

 

 

$

(8,037)

 

$

25,752

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Dividends and undistributed earnings allocated to participating securities

 

 

(314)

 

 

(191)

 

 

 

(997)

 

 

(612)

 

 

Net income (loss) available for common stockholders, net of dividends and undistributed earnings allocated to participating securities

 

$

(13,832)

 

 

6,835

 

 

$

(9,034)

 

 

25,140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

79,199,142

 

 

38,351,465

 

 

 

53,520,346

 

 

38,264,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings per share

 

$

(0.17)

 

$

0.18

 

 

$

(0.17)

 

$

0.66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  September 30,

 

 

Nine Months Ended  September 30,

 

 

(in thousands, except for share or per share data)

    

2017

    

2016

 

    

2017

    

2016

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available for common stockholders, net of dividends and undistributed earnings allocated to participating securities

 

$

(13,832)

 

$

6,835

 

 

$

(9,034)

 

$

25,140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued and outstanding

 

 

79,199,142

 

 

38,351,465

 

 

 

53,520,346

 

 

38,264,139

 

 

Issuable pursuant to 2015 Management Incentive Plan(1)

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 

 

 

79,199,142

 

 

38,351,465

 

 

 

53,520,346

 

 

38,264,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings per share

 

$

(0.17)

 

$

0.18

 

 

$

(0.17)

 

$

0.66

 

 

 Three Months Ended September 30,Nine Months Ended September 30,
(in thousands, except for share or per share data)2020201920202019
Basic earnings (loss) per share:  
Net income (loss) available for common stockholders$116,709 $(4,312)$536,917 $(40,876)
Less: Dividends and undistributed earnings allocated to participating securities(3,417)(461)(14,210)(1,368)
Net income (loss) available for common stockholders, net of dividends and undistributed earnings allocated to participating securities113,292 (4,773)522,707 (42,244)
Weighted average shares of common stock outstanding:
Class A122,686,931 117,548,769 121,328,895 112,602,934 
Basic earnings (loss) per share$0.92 $(0.04)$4.31 $(0.38)
 Three Months Ended September 30,Nine Months Ended September 30,
(in thousands, except for share or per share data)2020201920202019
Diluted earnings (loss) per share:  
Net income (loss) available for common stockholders, net of dividends and undistributed earnings allocated to participating securities$113,292 $(4,773)$522,707 $(42,244)
Weighted average shares of common stock outstanding:
Class A
Issued and outstanding122,686,931 117,548,769 121,328,895 112,602,934 
Issuable pursuant to Amended and Restated 2015 Management Incentive Plan, Amended and Restated Investment Technology Group, Inc. 2007 Omnibus Equity Compensation Plan, and Warrants issued in connection with the Founder Member Loan (1)1,085,074 0 610,944 0 
123,772,005 117,548,769 121,939,839 112,602,934 
Diluted earnings (loss) per share$0.92 $(0.04)$4.29 $(0.38)

(1)

The dilutive impact of unexercised stock options excludes from the computation of EPS 1,578,617 and 1,151,260 options for the three months ended September 30, 2017 and 2016, respectively, and 1,704,307 and 383,294 options for the nine months ended September 30, 2017 and 2016, respectively, because inclusion of the options would have been anti-dilutive.

5.

(1)The dilutive impact excludes from the computation of earnings (loss) per share for the three and nine months ended September 30, 2019, respectively, 205,683 and 574,047 unexercised stock options and 221,837 and 264,866 restricted stock units issuable pursuant to the Amended and Restated Investment Technology Group, Inc. 2007 Omnibus Equity Compensation Plan because the inclusion of these instruments would have been anti-dilutive.

6. Tax Receivable Agreements


In connection with the IPO and the Reorganization Transactions, the Company entered into tax receivable agreements to make payments to certain pre-IPO equity holders (“Virtu Members, as defined in Note 14,Members”) that are generally equal to 85% of the applicable cash tax savings, if any, that the Company actually realizes as a result of favorable tax attributes that were and will continue to be available to the Company as a result of the Reorganization Transactions, exchanges of membership interests for Class A common stockCommon Stock or Class B common stock, par value $0.00001 per share (the “Class B Common Stock”), (an “Exchange”), and payments made under the tax receivable agreements. An Exchange during the year will give rise to favorable tax attributes that may generate cash tax savings specific to the Exchange to be realized over a specific period of time (generally 15 years). At
23
Table of Contents
each Exchange, management estimates the Company’s cumulative TRA obligations to be reported on the Condensed Consolidated Statement of Financial Condition, which amounted to $256.0 million and $269.3 million as of September 30, 2020 and December 31, 2019, respectively. The tax attributes are computed as the difference between the Company's basis in the partnership interest (“outside basis”) as compared to the Company’s share of the adjusted tax basis of partnership property (“inside basis”) at the time of each Exchange. The computation of inside basis requires management to make judgments in estimating the components included in the inside basis as of the date of the Exchange (i.e., cash received by the Company on hypothetical sale of assets, allocation of gain/loss to the Company at the time of the Exchange taking into account complex partnership tax rules). In addition, management estimates the period of time that may generate cash tax savings of such tax attributes and the realizability of the tax attributes. Payments will occur only after the filing of the U.S. federal and state income tax returns and realization of the cash tax savings from the favorable tax attributes. The first payment was due 120 days after the filing of the Company’s tax return for the year ended December 31, 2015, which was due March 15, 2016, but the due date was extended until September 15, 2016. Future payments under the tax receivable agreements in respect of subsequent exchanges would be in addition

22

Table of Contents

to these amounts. The Company made its first payment of $7.0 million in February 2017.

2017, its second payment of $12.4 million in September 2018, and its third payment of $13.3 million in March 2020.


As a result of (i) the purchase of equity interests in Virtu Financial from certain Virtu Members in connection with the Reorganization Transactions, (ii) the purchase of non-voting common interest units in Virtu Financial (the “Virtu Financial Units”) (along with the corresponding shares of Class C common stock)stock, par value $0.00001 per share (the “Class C Common Stock”)) from certain of the Virtu Members in connection with the IPO, (iii) the purchase of Virtu Financial Units (along with the corresponding shares of Class C common stock)Common Stock) and the exchange of Virtu Financial Units (along with the corresponding shares of Class C common stock)Common Stock) for shares of Class A common stockCommon Stock in connection with the secondary offerings completed in November 2015 (the “November 2015 Secondary Offerings,Offering”) and September 2016 (the “September 2016 Secondary Offering”), and (iv) the Company recorded a deferred tax assetpurchase of $218.4 million associatedVirtu Financial Units (along with corresponding shares of the Company’s Class D common stock, par value $0.00001 per share (the “Class D Common Stock”) in connection with the increase in tax basis that results from such events. PaymentsMay 2018 Secondary Offering (defined below) and the May 2019 Secondary Offering (defined below, and, together with the November 2015 Secondary Offering, the September 2016 Secondary Offering, and the May 2018 Secondary Offering, the “Secondary Offerings”), payments to certain Virtu Members in respect of the purchases are expected to aggregate to approximately $238.6 million, rangingrange from approximately $0.4$3.3 million to $21.4$20.7 million per year over the next 15 years. The corresponding deduction to additional paid-in capital was approximately $20.2 million for the difference between the tax receivable agreements liability and the related deferred tax asset.

In connection with the February 2017, May 2017, and August 2017 employee exchanges (asand May 2018 Secondary Offering between the Company and TJMT Holdings LLC and the other selling stockholders, both as described in Note 14)18 “Capital Structure”, the Company recorded an additional deferred tax asset of $9.5$78.7 million and a payment liability pursuant to the tax receivable agreements of $79.7 million, with the $1.0 million difference recorded as a decrease to additional paid-in capital during the year ended December 31, 2018.

In connection with the employee exchanges and May 2019 Secondary Offering between the Company and TJMT Holdings LLC and the other selling stockholders, both as described in Note 18 “Capital Structure”, the Company recorded an additional deferred tax asset of $49.1 million and payment liability pursuant to the tax receivable agreements of $8.2$54.9 million, with the $1.3$5.8 million difference recorded as an increasea decrease to additional paid-in capital.capital during the year ended December 31, 2019.

At September 30, 2020 and December 31, 2019, the Company’s remaining deferred tax assets that relate to the matters described above were approximately $184.2 million and $197.6 million, respectively, and the Company’s liabilities over the next 15 years pursuant to the tax receivable agreements were approximately $256.0 million and $269.3 million, respectively. The amounts recorded as of September 30, 20172020 are based on best estimates available at the respective dates and may be subject to change after the filing of the Company’s U.S. federal and state income tax returns for the years in which tax savings were realized. At September 30, 2017 and December 31, 2016, the Company’s remaining deferred tax assets were approximately $191.3 million and $185.6 million, respectively, and the Company’s payment liabilities pursuant to the tax receivable agreements were approximately $232.6 million and $231.4 million, respectively.

Approximately $22.1 million of the Company’s deferred tax assets at September 30, 2017 are a result of the Acquisition as described in Note 3.


For the tax receivable agreements discussed above, the cash savings realized by the Company are computed by comparing the actual income tax liability of the Company to the amount of such taxes the Company would have been required to pay had there been (i) no increase to the tax basis of the assets of Virtu Financial as a result of the purchase or exchange of Virtu Financial Units, (ii) no tax benefit from the tax basis in the intangible assets of Virtu Financial on the date of the IPO and (iii) no tax benefit as a result of the Net Operating Losses (“NOLs”) and other tax attributes of Virtu Financial. Subsequent adjustments of the tax receivable agreements obligations due to certain events (e.g., changes to the expected realization of NOLs or changes in tax rates) will be recognized within operating expensesincome before taxes and noncontrolling interests in the condensed consolidated statementsCondensed Consolidated Statements of comprehensive income (loss).

6.Comprehensive Income.


24
Table of Contents
7. Goodwill and Intangible Assets

Prior to the Acquisition, the Company was managed and operated as one business, and accordingly, operated under one reportable segment.  As a result of the acquisition of KCG, beginning in the third quarter of 2017 the


The Company has three2 operating segments: (i) Market Making; (ii) Execution Services; and (iii)1 non-operating segment: Corporate. The Company allocatedAs of September 30, 2020 and December 31, 2019, the Company’s total amount of goodwill to the new reporting units using a relative fair value approach. In addition, the Company performed an assessment of potentialrecorded was $1,148.9 million. NaN goodwill impairment for all reporting units immediately prior towas recognized during the reallocationthree and determined that no impairment was indicated.

nine months ended September 30, 2020 or 2019.


The following table presents the details of goodwill by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market

 

Execution

 

 

 

 

 

(in thousands)

 

Making

 

Services

 

Corporate

 

Total

 

Balance as of December 31, 2016

    

$

657,985

    

$

57,394

    

$

 —

    

$

715,379

 

Additions

 

 

108,276

 

 

35,943

 

 

 —

 

 

144,219

 

Balance as of September 30, 2017

 

$

766,261

 

$

93,337

 

$

 —

 

$

859,598

 

On May 3, 2017, the Company completed the acquisition of certain legal entities that owned select strategic telecommunications assets from Teza Technologies. The total purchase price incurred was $5.6 million, of which $1.2 million was recorded as goodwill, and $1.9 million was recorded as intangible assets. This acquisition was accounted for

23

Table of Contents

as a business combination. The acquisition related disclosures required by ASC 805 Business Combinations were finalizedsegment as of September 30, 2017, a decrease of $1.9 million in goodwill2020 and an increase of $1.9 million in intangible assets were recorded as adjustments to preliminary analysis during the three months ended September 30, 2017.

As described in Note 3 “Merger of Virtu Financial, Inc. and KCG Holdings, Inc.”, on July 20, 2017 the Company completed the acquisition of KCG. The aggregate cash purchase price of $1.40 billion has been allocated to the assets acquired and liabilities assumed using their estimated fair values at the Closing Date of the Acquisition. The Company has allocated $143.0 million and $156.3 million to goodwill and identified intangible assets, respectively This Acquisition was accounted for as a business combination.

The Company recorded provisional amounts based upon its best estimate of the value as a result of preliminary analysis. December 31, 2019:

(in thousands)Market MakingExecution ServicesCorporateTotal
Balance as of period-end$755,292 $393,634 $0 $1,148,926 

As of September 30, 20172020 and December 31, 2016,2019, the Company’sCompany's total amount of goodwillintangible assets recorded was $859.6$473.3 million and $715.4$529.6 million, respectively. No goodwill impairment was recognized in the three and nine months ended September 30, 2017 and 2016.

Acquired intangible assets consisted of the following:

following as of September 30, 2020 and December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2017

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

Net Carrying

 

Useful Lives

 

 As of September 30, 2020

(in thousands)

 

Amount 

 

Amortization 

 

Amount 

 

(Years) 

 

(in thousands)Gross Carrying Amount Accumulated Amortization Net Carrying Amount Useful Lives
(Years) 

Purchased technology

    

$

110,000

    

$

110,000

    

$

 —

    

1.4

 to 

2.5

 

Customer relationshipsCustomer relationships486,600 (82,338)404,262 10to12
TechnologyTechnology136,000 (76,838)59,162 1to6
Favorable occupancy leasesFavorable occupancy leases5,895 (2,641)3,254 3to15
Exchange membershipsExchange memberships4,739 — 4,739 Indefinite
Trade nameTrade name3,600 (1,900)1,700 3

ETF issuer relationships

 

 

950

 

 

533

 

 

417

 

 

 9

 

 

ETF issuer relationships950 (850)100 9

ETF buyer relationships

 

 

950

 

 

533

 

 

417

 

 

 9

 

 

ETF buyer relationships950 (850)100 9

Leases

 

 

1,800

 

 

247

 

 

1,553

 

 

 3

 

 

FCC licenses

 

 

200

 

 

12

 

 

188

 

 

 7

 

 

Technology

 

 

67,800

 

 

5,001

 

 

62,799

 

1

to

 6

 

Customer relationships

 

 

77,100

 

 

1,027

 

 

76,073

 

13

to

17

 

Trade names

 

 

5,000

 

 

98

 

 

4,902

 

 

10

 

 

Exchange memberships

 

 

6,400

 

 

 —

 

 

6,400

 

 

Indefinite

 

 

 

$

270,200

 

$

117,451

 

$

152,749

 

 

 

 

 

 $638,734 $(165,417)$473,317 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

Net Carrying

 

Useful Lives

 

As of December 31, 2019

(in thousands)

 

Amount 

 

Amortization 

 

Amount 

 

(Years) 

 

(in thousands)Gross Carrying AmountAccumulated AmortizationNet Carrying AmountUseful Lives
(Years)
Customer relationshipsCustomer relationships486,600 (46,456)440,144 10to12
TechnologyTechnology136,000 (58,203)77,797 1to6

Purchased technology

    

$

110,000

    

$

110,000

    

$

 —

    

1.4

 to 

2.5

 

Purchased technology110,000 (110,000)0 1.4to2.5
Favorable occupancy leasesFavorable occupancy leases5,895 (2,040)3,855 3to15
Exchange membershipsExchange memberships4,882 — 4,882 Indefinite
Trade nameTrade name3,600 (1,000)2,600 3

ETF issuer relationships

 

 

950

 

 

454

 

 

496

 

 

 9

 

 

ETF issuer relationships950 (770)180 9

ETF buyer relationships

 

 

950

 

 

454

 

 

496

 

 

 9

 

 

ETF buyer relationships950 (770)180 9

 

$

111,900

 

$

110,908

 

$

992

 

 

 

 

 

$748,877 $(219,239)$529,638 

Amortization expense relating to finite-lived intangible assets was approximately $6.4$18.3 million and $0.05$18.9 million for the three months ended September 30, 20172020 and 2016,2019, respectively, and approximately $6.5$56.2 million and $0.16$50.4 million for the nine months ended September 30, 20172020 and 2016,2019, respectively. This is included in amortizationAmortization of purchased intangibles and acquired capitalized software in the accompanying condensed consolidated statementsCondensed Consolidated Statements of comprehensive income (loss).

Comprehensive Income.

24


25
Table of Contents

7.The Company expects to record amortization expense as follows over the remaining current year and five subsequent years:


(in thousands)September 30, 2020
Remainder of 2020$18,076 
202169,676 
202264,852 
202363,960 
202450,845 
202547,879 

8. Receivables from/Payables to Broker-Dealers and Clearing Organizations


The following is a summary of receivables from and payables to brokers-dealers and clearing organizations at September 30, 20172020 and December 31, 2016:

2019:

 

 

 

 

 

 

 

(in thousands)

 

2017

 

2016

 

(in thousands)September 30, 2020December 31, 2019

Assets

    

 

 

    

 

 

 

Assets

Due from prime brokers

 

$

196,487

 

$

91,476

 

Due from prime brokers$643,089 $418,059 

Deposits with clearing organizations

 

 

156,127

 

 

21,995

 

Deposits with clearing organizations386,460 231,977 

Net equity with futures commission merchants

 

 

187,424

 

 

213,030

 

Net equity with futures commission merchants207,213 267,748 

Unsettled trades with clearing organization

 

 

191,212

 

 

44,312

 

Unsettled trades with clearing organizationsUnsettled trades with clearing organizations392,349 214,618 

Securities failed to deliver

 

 

231,135

 

 

77,915

 

Securities failed to deliver228,677 178,324 

Commissions and fees

 

 

18,133

 

 

 —

 

Commissions and fees24,093 7,858 

Total receivables from broker-dealers and clearing organizations

 

$

980,518

 

$

448,728

 

Total receivables from broker-dealers and clearing organizations$1,881,881 $1,318,584 

Liabilities

 

 

 

 

 

 

 

Liabilities

Due to prime brokers

 

$

409,323

 

$

227,335

 

Due to prime brokers$330,078 $511,524 

Net equity with futures commission merchants

 

 

42,634

 

 

38,838

 

Net equity with futures commission merchants69,480 50,950 

Unsettled trades with clearing organization

 

 

318,207

 

 

429,800

 

Unsettled trades with clearing organizationsUnsettled trades with clearing organizations178,361 118,286 

Securities failed to receive

 

 

66,194

 

 

 5

 

Securities failed to receive93,973 144,494 

Commissions and fees

 

 

2,709

 

 

 —

 

Commissions and fees3,140 1,496 

Total payables to broker-dealers and clearing organizations

 

$

839,067

 

$

695,978

 

Total payables to broker-dealers and clearing organizations$675,032 $826,750 


Included as a deduction from “Due from prime brokers” and “Net equity with futures commission merchants” is the outstanding principal balance on all of the Company’s short-termprime brokerage credit facilities (described in Note 9)10 “Borrowings”) of approximately $159.1$163.6 million and $309.1$134.3 million as of September 30, 20172020 and December 31, 2016,2019, respectively. The loan proceeds from the credit facilities are available only to meet the initial margin requirements associated with the Company’s ordinary course futures and other trading positions, which are held in the Company’s trading accounts with an affiliate of the respective financial institutions. The credit facilities are fully collateralized by the Company’s trading accounts and deposit accounts with these financial institutions. “Securities failed to deliver” and “Securities failed to receive” include amounts with a clearing organization and other broker-dealers.

8.


9. Collateralized Transactions


The Company is permitted to sell or repledge securities received as collateral and use these securities to secure repurchase agreements, enter into securities lending transactions or deliver these securities to counterparties or clearing organizations to cover short positions. At September 30, 20172020 and December 31, 2016,2019, substantially all of the securities received as collateral have been repledged.

26
Table of Contents
The fair value of the collateralized transactions at September 30, 20172020 and December 31, 20162019 are summarized as follows:

 

 

 

 

 

 

 

(in thousands)

 

2017

 

2016

 

(in thousands)September 30, 2020December 31, 2019

Securities received as collateral:

    

 

 

    

 

 

 

Securities received as collateral:

Securities borrowed

 

$

1,479,107

 

$

213,203

 

Securities borrowed$1,288,866 $1,881,005 

Securities purchased under agreements to resell

 

 

8,196

 

 

 —

 

Securities purchased under agreements to resell17,397 142,922 

 

$

1,487,303

 

$

213,203

 

 $1,306,263 $2,023,927 

In the normal course of business, the Company pledges qualified securities with clearing organizations to satisfy daily margin and clearing fund requirements.


Financial instruments owned and pledged, where the counterparty has the right to repledge, at September 30, 20172020 and December 31, 20162019 consisted of the following:

 

 

 

 

 

 

 

 

(in thousands)

 

2017

 

2016

 

Equities

    

$

692,130

    

$

128,202

 

Exchange traded notes

 

 

7,022

 

 

15,681

 

 

 

$

699,152

 

$

143,883

 

25


(in thousands)September 30, 2020December 31, 2019
Equities$599,350 $654,366 
Exchange traded notes9,700 42,590 
 $609,050 $696,956 

Table

10. Borrowings

Short-term Borrowings, net

The following summarizes the Company's short-term borrowing balances outstanding, net of Contents

related debt issuance costs, with each described in further detail below.

9. Borrowings

Outstanding borrowings and financing capacity or unused available capacity under the Company’s borrowing arrangements were as follows:

September 30, 2020
(in thousands)Borrowing OutstandingDeferred Debt Issuance CostShort-term Borrowings, net
Broker-dealer credit facilities$78,000 $(981)$77,019 
Short-term bank loans46,974 0 46,974 
$124,974 $(981)$123,993 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2017

 

At December 31, 2016

 

 

 

 

 

Financing

 

 

Borrowing

 

 

Financing

 

 

Borrowing

 

 

(in thousands)

 

 

Available

 

 

Outstanding

 

 

Available

 

 

Outstanding

 

 

Broker-dealer credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncommitted facility

 

$

125,000

 

$

15,000

 

$

125,000

 

$

25,000

 

 

Committed facility

 

 

 —

 

 

 —

 

 

75,000

 

 

 —

 

 

 

 

$

125,000

 

$

15,000

 

$

200,000

 

$

25,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-Term Credit Facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term credit facilities (1)

 

$

543,000

 

$

159,128

 

$

493,000

 

$

309,086

 

 

 

 

$

543,000

 

$

159,128

 

$

493,000

 

$

309,086

 

December 31, 2019
(in thousands)Borrowing OutstandingDeferred Debt Issuance CostShort-term Borrowings, net
Broker-dealer credit facilities$30,000 $(2,100)$27,900 
Short-term bank loans45,586 0 45,586 
$75,586 $(2,100)$73,486 

(1)

Outstanding borrowings were included with receivable from broker-dealers and clearing organization within the consolidated statements of financial condition.


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2017

 

At December 31, 2016

 

 

 

 

Maturity

 

 

Unused Available

 

 

Borrowing

 

 

Unused Available

 

 

Borrowing

 

 

(in thousands)

 

Date

 

 

Capacity

 

 

Outstanding

 

 

Capacity

 

 

Outstanding

 

 

Long-term borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior secured credit facility

 

December 2021

 

$

n/a

 

$

928,089

 

$

n/a

 

$

535,104

 

 

Senior secured Second Lien Notes

 

June 2022

 

 

n/a

 

 

475,485

 

 

n/a

 

 

n/a

 

 

Revolving credit facility

 

April 2018

 

 

 —

 

 

 —

 

 

100,000

 

 

 —

 

 

SBI bonds

 

January 2020

 

 

n/a

 

 

31,055

 

 

n/a

 

 

29,853

 

 

 

 

 

 

$

0

 

$

1,434,629

 

$

100,000

 

$

564,957

 

Broker-Dealer Credit Facilities


The Company is a party to two2 secured credit facilities with the samea financial institution to finance overnight securities positions purchased as part of its ordinary course broker-dealer market making activities. OneNaN of the facilities (the “Uncommitted Facility”), is provided on an uncommitted basis with an aggregate borrowing limit of $300 million, which was subsequently increased to $400 million in April 2020, and is available for borrowingscollateralized by the trading and deposit account of one of the Company’s broker-dealer subsidiaries up to a maximum amount of $125.0 million. In connection with this credit facility,maintained at the financial institution.

On November 3, 2017, the Company has entered into demand promissory notes dated February 20, 2013. The loans provided under the Uncommitted Facility are collateralized by the Company’s broker-dealer trading and deposit accounts with the same financial institution and, bear interest at a rate set by the financial institution on a daily basis 2.16% at September 30, 2017 and 1.66% at December 31, 2016). The Company was party to anothersecond credit facility (the “Committed Facility”) with the same financial institution dated July 22, 2013which was subsequently amended and restated March 1, 2019 to increase the borrowing limit to $600 million and subsequently amended to adjust sublimits and certain other terms, including most recently on July 29, 2020. The Committed Facility consists of 2 borrowing bases: Borrowing Base A Loan is to be used to finance the purchase and settlement of securities; Borrowing Base B Loan is to be used to fund margin deposit with the National Securities Clearing Corporation. Borrowing Base A Loans are available up to $600 million and bears interest at the adjusted LIBOR or base rate plus 1.25% per annum. Following the July 29, 2020 amendment, Borrowing Base B Loans are subject to a sublimit of $200 million and bear interest at the adjusted LIBOR or base rate plus 2.50% per annum. A commitment fee of 0.50% per annum on the average daily unused portion of this facility is payable quarterly in arrears.

27
Table of Contents
On March 26, 2014, July 21, 2014,10, 2020, a broker-dealer subsidiary of the Company entered into a short term loan arrangement with Jefferies Financial Group, Inc., as lender, for a $20 million demand loan (the "Demand Loan") repayable no later than ninety (90) days after the date of borrowing. The Demand Loan bore interest at a rate of 10% per annum, increased by 2.0% with respect to any principal amounts not paid when due and payable. The Demand Loan was repaid in full as of April 24, 2015,17, 2020.

On March 20, 2020, VAL, a broker-dealer subsidiary of the Company, entered into a Loan Agreement (the “Founder Member Loan Facility”) with TJMT Holdings LLC (the “Founder Member”), as lender and July 18, 2016, whichadministrative agent, providing for unsecured term loans from time to time (the “Founder Member Loans”) in an aggregate original principal amount not to exceed $300 million. The Founder Member Loans were available to be borrowed in one or more borrowings on or after March 20, 2020 and prior to September 20, 2020 (the "Founder Member Loan Term"). The Founder Member Loan Facility Term expired as of September 20, 2020 without VAL having borrowed any Founder Member Loans at any time. The Founder Member is provided onan affiliate of Mr. Vincent Viola, the Company’s founder and Chairman Emeritus. Upon the execution of and in consideration for the Lender’s commitments under the Loan Agreement, the Company delivered to the Founder Member a committed basis and is available for borrowings by onewarrant to purchase shares of the Company’s broker-dealer subsidiaries up to a maximumClass A Common Stock. Terms of the lesserwarrant are set forth in further detail in Note 18 “Capital Structure”. The foregoing description of $75.0the Founder Member Loan Facility does not purport to be complete and is qualified in its entirety by reference to the complete text of the Founder Member Loan Facility, which is filed as an exhibit to the Company's 2020 quarterly report on Form 10-Q for the period ended March 31, 2020 filed with Securities and Exchange Commission on May 11, 2020.

The following summarizes the Company’s broker-dealer credit facilities' carrying values, net of unamortized debt issuance costs, where applicable. These balances are included within Short-term borrowings on the Condensed Consolidated Statement of Financial Condition.

 At September 30, 2020
(in thousands)Interest RateFinancing AvailableBorrowing OutstandingDeferred Debt Issuance CostOutstanding Borrowings, net
Broker-dealer credit facilities:     
Uncommitted facility1.09%$400,000 $78,000 $(981)$77,019 
Committed facility1.41%600,000 0 0 0 
 $1,000,000 $78,000 $(981)$77,019 
 At December 31, 2019
(in thousands)Interest RateFinancing AvailableBorrowing OutstandingDeferred Debt Issuance CostOutstanding Borrowings, net
Broker-dealer credit facilities:     
Uncommitted facility2.55%$200,000 $30,000 $(2,100)$27,900 
Committed facility3.01%600,000 0 0 0 
 $800,000 $30,000 $(2,100)$27,900 

The following summarizes interest expense for the broker-dealer facilities. Interest expense is included within Interest and dividends expense in the accompanying Condensed Consolidated Statements of Comprehensive Income.

 Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2020201920202019
Broker-dealer credit facilities:
Uncommitted facility$244 $327 $1,007 $688 
Committed facility71 138 433 393 
Demand Loan0 0 211 0 
 $315 $465 $1,651 $1,081 

Short-Term Bank Loans

The Company’s international securities clearance and settlement activities are funded with operating cash or with short-term bank loans in the form of overdraft facilities. At September 30, 2020, there was $47.0 million or an amount determined basedassociated with international settlement activities outstanding under these facilities at a weighted average interest rate of approximately 2.0%. At December 31, 2019, there was $45.6 million associated with international settlement activities outstanding under these facilities at a weighted average interest rate of approximately 4.5%. These short-term bank loan balances are included within Short-term borrowings on agreed advance ratesthe Condensed Consolidated Statement of Financial Condition.
28
Table of Contents

First Lien Revolving Facility

The Company's Amended Credit Agreement (as defined below) provides for pledged securities. The Committed Facility was terminateda $50.0 million senior secured first lien revolving facility. There were 0 outstanding borrowings under the facility as of September 30, 2017. Interest2020 or December 31, 2019. There was minimal interest expense in relation to this facility for the three months ended September 30, 20172020 and 2016 was approximately $0.4 million and $0.3 million, respectively, and for the nine months ended September 30, 2017 and 2016 was approximately $1.4 million and $0.8 million, respectively. Interest expense is included within interest and dividends expense in the accompanying condensed consolidated statements of comprehensive income (loss).

2020.

26


Table of Contents

Short-TermPrime Brokerage Credit Facilities

The Company maintains short-term credit facilities with various prime brokers and other financial institutions from which it receives execution or clearing services. The proceeds of these facilities are used to meet margin requirements associated with the products traded by the Company in the ordinary course, and amounts borrowed are collateralized by the Company’s trading accounts with the applicable financial institution. Borrowings bore interest at a weighted average interest rate

 At September 30, 2020
(in thousands)Weighted Average
Interest Rate		Financing
Available		Borrowing
Outstanding
Prime Brokerage Credit Facilities:   
Prime brokerage credit facilities (1)2.81%$616,000 $163,592 
 $616,000 $163,592 
 At December 31, 2019
(in thousands)Weighted Average
Interest Rate		Financing
Available		Borrowing
Outstanding
Prime Brokerage Credit Facilities:   
Prime brokerage credit facilities (1)4.22%$586,000 $134,331 
 $586,000 $134,331 
(1)   Outstanding borrowings are included with Receivables from/ Payables to broker-dealers and clearing organizations within the Condensed Consolidated Statements of 3.56% and 3.12% per annum, as September 30, 2017 and December 31, 2016, respectively.  Financial Condition.

Interest expense in relation to the facilities was approximately $1.2 million and $1.6 million for the three months ended September 30, 20172020 and 2016 was approximately $1.42019, respectively, and $3.8 million and $1.8$5.3 million respectively, and for the nine months ended September 30, 20172020 and 2016 was $4.8 million2019, respectively.

Long-Term Borrowings

The following summarizes the Company’s long-term borrowings, net of unamortized discount and $5.0 million, respectively. Interest expense is recorded within interest and dividends expensedebt issuance costs, where applicable:

  At September 30, 2020
(in thousands)Maturity
Date		Interest
Rate		Outstanding PrincipalDiscountDeferred Debt Issuance CostOutstanding Borrowings, net
Long-term borrowings:      
  First Lien Term Loan FacilityMarch 20263.15%$1,636,512 $(4,953)$(27,653)$1,603,906 
  SBI bondsJanuary 20235.00%33,182 0 (259)32,923 
 $1,669,694 $(4,953)$(27,912)$1,636,829 
  At December 31, 2019
(in thousands)Maturity
Date		Interest
Rate		Outstanding PrincipalDiscountDeferred Debt Issuance CostOutstanding Borrowings, net
Long-term borrowings:      
  First Lien Term Loan FacilityMarch 20265.20%$1,925,000 $(6,795)$(32,513)$1,885,692 
  SBI bondsJanuary 20235.00%32,225 0 (51)32,174 
$1,957,225 $(6,795)$(32,564)$1,917,866 
29
Table of Contents

Credit Agreement

As described in Note 3 “ITG Acquisition”, in connection with the accompanying condensed consolidated statements of comprehensive income (loss).

Long-Term Borrowings

Senior Secured Credit Facility

On July 8, 2011,ITG Acquisition, Virtu Financial, its wholly owned subsidiary, VFH Parent LLC (“VFH”), and each of its unregulated domestic subsidiariesthe Acquisition Borrower entered into the credit agreement (the “Credit Agreement”) among VFH, Virtu Financial, Credit Suisse AG, as administrative agent, and the other parties thereto. The Credit Agreement, was amended on February 5, 2013, May 1, 2013, November 8, 2013 and October 27, 2016.

On June 30, 2017, Virtu Financial and VFH entered into a fourth amended and restated credit agreement (the “Fourth Amended and Restated Credit Agreement”) with the lenders party thereto, and JPMorgan Chase Bank, N.A.,Jefferies Finance LLC, as administrative agent soleand Jefferies Finance LLC and RBC Capital Markets, as joint lead arrangerarrangers and bookrunner, which amended and restated in its entirety the existing Credit Agreement.  joint bookrunners.


The Fourth Amended and Restated Credit Agreement provided for(i) a $540.0 millionsenior secured first lien secured term loan (together with the Incremental Term Loans, as defined below; the “First Lien Term Loan Facility”) in an aggregate principal amount of $1,500 million, drawn in its entirety on June 30, 2017,the ITG Closing Date, with approximately $404.5 million borrowed by VFH to repay all amounts outstanding under the Existing Term Loan Facility (as defined below) and continued VFH’s existing $100.0the remaining approximately $1,095 million borrowed by the Acquisition Borrower to finance the consideration and fees and expenses paid in connection with the ITG Acquisition, and (ii) a $50.0 million senior secured first lien senior secured revolving credit facility.  Also on June 30, 2017, Orchestra Borrower LLCfacility to VFH (the “Escrow Issuer”“First Lien Revolving Facility”), with a wholly owned subsidiary$5.0 million letter of credit subfacility and a $5.0 million swingline subfacility. After the ITG Closing Date, VFH assumed the obligations of the Company,Acquisition Borrower in respect of the acquisition term loans.

On October 9, 2019 (the “Amendment No. 1 Closing Date”), VFH entered into an escrow credit agreement (the “EscrowAmendment No. 1 (“Amendment No. 1”), which amended the Credit Agreement”) withAgreement dated as of March 1, 2019 by and among VFH, Virtu Financial, the lenders party thereto, and JPMorgan Chase Bank, N.A.,Jefferies Finance, LLC, as administrative agent sole lead arranger and bookrunner, which providedcollateral agent, to, among other things, provide for $525.0 million in aggregate principal amount of incremental term loans (the “Incremental Term Loans”), and amend the $610.0 million term loan (the “Escrowrelated collateral agreement. On the Amendment No. 1 Closing Date, VFH borrowed the Incremental Term Loan”),Loans and used the proceeds of which were deposited into escrow pending the closingtogether with available cash to redeem all of the Acquisition.   

Upon the closing of the Acquisition, the proceeds of the Escrow Term Loan were released to fund in part the Acquisition consideration, the obligations of the Escrow Issuer in respect of the Escrow Term Loan were assumed by VFH Parent and the Escrow Term Loan was deemed to be outstanding under the Fourth Amended and Restated Credit Agreement and the Escrow Credit Agreement and related credit documents automatically terminated and were superseded by the provisions of the Fourth Amended and Restated Credit Agreement,  In addition, the revolving credit facility under the Fourth Amended and Restated Credit Agreement terminated.

Under the Fourth Amended and Restated Credit Agreement, the $1,150.0$500.0 million aggregate principal amount of the outstanding 6.750% Senior Secured Second Lien Notes (as defined below) due 2022 issued by VFH and Orchestra Co Issuer, Inc., a Delaware corporation and indirect subsidiary of the Company (together with VFH, the “Issuers”), and paid related fees and expenses. The terms, conditions and covenants applicable to the Incremental Term Loans are the same as the terms, conditions and covenants applicable to the existing term loans under the Credit Agreement, including a maturity date of March 1, 2026.


On March 2, 2020 (the “Amendment No. 2 Closing Date”), VFH entered into Amendment No. 2 (“Amendment No. 2”), which further amended the Credit Agreement (as amended by Amendment No. 1 and Amendment No. 2, the “Amended Credit Agreement”) to, among other things, reduce the interest rate spread over adjusted LIBOR or the alternate base rate by 0.50% per annum and eliminated any stepdown in the spread based on VFH's first lien seniorleverage ratio. The term loan borrowings and revolver borrowings under the Amended Credit Agreement bear interest at a per annum rate equal to, at the Company's election, either (i) the greatest of (a) the prime rate in effect, (b) the greater of (1) the federal funds effective rate and (2) the overnight bank funding rate, in each case plus 0.50%, (c) an adjusted LIBOR rate for a Eurodollar borrowing with an interest period of one month plus 1.00% and (d) 1.00%, plus, in each case, 2.00%, or (ii) the greater of (x) an adjusted LIBOR rate for the interest period in effect and (y) 0%, plus, in each case, 3.00%. In addition, a commitment fee accrues at a rate of 0.50% per annum on the average daily unused amount of the First Lien Revolving Facility, with stepdowns to 0.375% and 0.25% per annum based on VFH’s first lien leverage ratio, and is payable quarterly in arrears.

On January 29, 2020, the Company entered into a five-year $1,000 million floating-to-fixed interest rate swap agreement. The Company also previously entered into a five-year $525 million floating-to-fixed interest rate swap agreement.
As these two interest rate swaps meet the criteria to be considered qualifying cash flow hedges under ASC 815, they effectively fix interest payment obligations on $1,000 million and $525.0 million of principal under the First Lien Term Loan Facility at rates of 4.4% and 4.3% through January 2025 and September 2024, respectively, based on the interest rates set forth in the Amended Credit Agreement.

The First Lien Revolving Facility under the Amended Credit Agreement is subject to a springing net first lien leverage ratio test which may spring into effect as of the last day of a fiscal quarter if usage of the aggregate revolving commitments exceeds a specified level as of such date. VFH is also subject to contingent principal prepayments based on excess cash flow and certain other triggering events. Borrowings under the Amended Credit Agreement are guaranteed by Virtu Financial and VFH’s material non-regulated domestic restricted subsidiaries and secured by substantially all of the assets of VFH and the guarantors, in each case, subject to certain exceptions.

Under the Amended Credit Agreement, term loans including the Escrow Term Loan (the “Term Loan Facility”), was scheduled towill mature on December 30, 2021 and will require scheduledMarch 1, 2026. The term loans amortize in annual amortization payments on each of the first four anniversaries of the Closing Date in an amountinstallments equal to the sum of 7.5%1.0% of the original aggregate principal amount of the term loan issued under the Fourth Amended and Restated Credit Agreement and 7.5% of the aggregate principal amount of the Escrow Term Loan outstandingloans. The revolving commitments will terminate on the Closing Date.March 1, 2022. During the three monthsyear ended September 30, 2017, $200.0December 31, 2019, $100.0 million was repaid under the Fourth Amended and Restated Credit Agreement.First Lien Term Loan Facility. In August of 2020, an additional $100 million was repaid under this facility. As of September 30, 2017, $950.02020, $1,637 million was outstanding under the Fourth Amended and Restated Credit Agreement.

All obligations under theFirst Lien Term Loan Facility are unconditionally guaranteed by Virtu Financial and VFH’s existing direct and indirect wholly-owned domestic restricted subsidiaries (including, KCG and its wholly-owned domestic restricted subsidiaries), subject to certain exceptions, including exceptions for our broker dealer subsidiaries and certain immaterial subsidiaries. The Term Loan Facility and related guarantees are secured by first-priority perfected liens, subject to certain exceptions, on substantially all of VFH’s and the guarantors’ existing and future assets, including substantially all material personal property and a pledge of the capital stock of VFH, the guarantors (other than Virtu

Facility.

27


30
Table of Contents

Financial) and the direct domestic subsidiaries of VFH and the guarantors and 100% of the non-voting capital stock and up to 65% of the voting capital stock of foreign subsidiaries that are directly owned by VFH or any of the guarantors.

Amounts outstanding under the FourthThe Amended and Restated Credit Agreement bear interest as follows:

·

in the case of the term loans, at VFH’s option, at either (a) the greatest of (i) the prime rate in effect, (ii) the NYFRB rate plus 0.50%, (iii) the adjusted LIBOR rate for a Eurodollar borrowing with a one month interest period plus 1.00%, and (iv) 2.00% plus, in each case, 2.75% per annum; or (b) the greater of (i) the adjusted LIBOR rate for the interest period then in effect and (ii) 1.00% plus, in each case, 3.75% per annum; and

·

in the case of revolving loans, at VFH’s option, at either (a) the greatest of (i) the prime rate in effect, (ii) the NYFRB rate plus 0.50%, (iii) the adjusted LIBOR rate for a Eurodollar borrowing with an interest period of one month plus 1.00%, and (iv) 1.00% plus, in each case, 2.00% per annum; or (b) the greater of (i) the adjusted LIBOR rate for the interest period then in effect and (ii) zero plus, in each case, 3.00% per annum.

Under the Fourth Amended and Restated Credit Agreement, we must comply on a quarterly basis with:

·

a maximum total leverage ratio of 5.00 to 1.0 with a step-down to (i) 4.25 to 1.0 from and after the fiscal quarter ending March 31, 2019, (ii) 3.50 to 1.0 from and after the fiscal quarter ending March 31, 2020 and (iii) 3.25 to 1.0 from the fiscal quarter ending March 31, 2021 and thereafter; and

·

a minimum interest coverage ratio of 2.75 to 1.0, stepping up to 3.00 to 1.0 from and after the fiscal quarter ending March 31, 2019.

The Fourth Amended and Restated Credit Agreement contains certain customary affirmative covenants. The negative covenants in the Fourth Amended and Restated Credit Agreement include, among other things, limitations on our ability to do the following, subject to certain exceptions: (i) incur additional debt; (ii) create liens on certain assets; (iii) make certain loans or investments (including acquisitions); (iv) pay dividends on or make distributions in respect of our capital stock or make other restricted junior payments; (v) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; (vi) sell or otherwise dispose of assets, including equity interests in our subsidiaries; (vii) enter into certain transactions with our affiliates; (viii) enter into swaps, forwards and similar agreements; (ix) enter into sale-leaseback transactions; (x) restrict liens and subsidiary dividends; (xi) change our fiscal year; and (xii) modify the terms of certain debt agreements.

The Fourth Amended and Restated Credit Agreement contains certain customary events of default, including relating to a change of control. If an event of default occurs and is continuing, the lenders under the Fourth Amended and Restated Credit Agreement will be entitled to take various actions, including the acceleration of amounts outstanding under the Fourth Amended and Restated Credit Agreement and all actions permitted to be taken by a secured creditor in respect of the collateral securing the obligations under the Amended Credit Agreement.


To finance the Acquisition of KCG, on June 30, 2017, Virtu Financial and VFH previously entered into the Fourth Amended and Restated Credit Agreement.

In connectionAgreement which, upon the closing of the Acquisition of KCG, provided for an aggregate $1,150.00 million of first lien secured term loans (the “KCG Acquisition Term Loan Facility”). The KCG Acquisition Term Loan Facility was fully terminated following its repayment in full with the refinancing and the $200 million debt repayment, the Company accelerated certain unamortized financing costs incurred in connection with the credit facility that were scheduled to be amortized over the termproceeds of the loan, including original issue discount and underwriting and legal fees. During the three and nine months ended September 2017, the Company recorded $4.9 million and $9.4 million, respectively, in such costs which is included within debt issue cost related to debt refinancing in the condensed consolidated statements of comprehensive income.

First Lien Term Loan Facility described above.


Senior Secured Second Lien Notes

On


To finance the Acquisition of KCG, on June 16, 2017, the Escrow IssuerOrchestra Borrower LLC (the “Escrow Issuer”), a wholly owned subsidiary of Virtu Financial, and Orchestra Co-Issuer, Inc. (the “Co-Issuer”) completed the offering of $500$500.0 million aggregate principal amount of 6.750% Senior Secured Second Lien Notes due 2022 (the “Notes”). The Notes were issued under an Indenture, dated June 16, 2017 (the “Indenture”), among the Escrow Issuer, the Co-Issuer and U.S. Bank National Associations,Association, as trustee and collateral agent. The Notes mature on June 15, 2022. Interest on the

28


Table of Contents

Notes accrues at 6.750% per annum, payable every six months through maturity on each June 15 and December 15, beginning on December 15, 2017.

On July 20, 2017, VFH assumed all of the obligations of the Escrow Issuer under the Indenture and the Notes. The Notes are guaranteed by Virtu Financial and each of Virtu Financial’s wholly-owned domestic restricted subsidiaries that guarantees the Fourth Amended and Restated Credit Agreement, including KCG and certain of its subsidiaries and the Escrow Issuer. We refer to VFH and the Co-Issuer together as, the “Issuers.”

The Notes and the related guarantees are secured by second-priority perfected liens on substantially all of the Issuers’ and guarantors’ existing and future assets, subject to certain exceptions, including all material personal property, a pledge of the capital stock of the Issuers, the guarantors (other than Virtu Financial) and the direct subsidiaries of the Issuers and the guarantors and up to 65.0% of the voting capital stock of any now-owned or later-acquired foreign subsidiaries that are directly owned by the Issuers or any of the guarantors, which assets will also secure obligations under the Fourth Amended and Restated Credit Agreement on a first-priority basis.

Prior to June 15, 2019, the Company may redeem some or all of the Notes at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest, if any, to (but not including) the date of redemption, plus an applicable “make whole” premium (calculated based upon the yield of certain U.S. treasury securities plus 0.50%).

Prior to June 15, 2019, the Company may redeem up to 35% of the aggregate principal amount of the Notes at a redemption price equal to 106.750% of the principal amount thereof, plus accrued and unpaid interest, if any, to (but not including) the date of redemption with the net cash proceeds from certain equity offerings.

Upon the occurrence of specified change of control events as defined in the indenture governing the Notes, the Company must offer to repurchase the Notes at 101% of the principal amount, plus accrued and unpaid interest, if any, to (but excluding) the purchase date.

On or after June 15, 2019, the Company may redeem some or all of the Notes, at the following redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest to (but not including) the date of redemption, if redeemed during the 12-month period beginning on June 15 of the years indicated below:

 

 

 

 

 

Period

 

 

Percentage

 

2019

 

 

103.375%

 

2020

 

 

101.688%

 

2021 and thereafter

 

 

100.000%

 

The Indenture imposes certain limitations on the Company’s ability to (i) incur or guarantee additional indebtedness or issue preferred stock; (ii) pay dividends, make certain investments and make repayments on indebtedness that is subordinated in right of payment to the Notes and make other “restricted payments”; (iii) create liens on their assets to secure debt; (iv) enter into transactions with affiliates; (v) merge, consolidate or amalgamate with another company; (vi) transfer and sell assets; and (vii) permit restrictions on the payment of dividends by Virtu Financial’s subsidiaries. The Indenture also contains customary events of default, including, among others, payment defaults related to the failure to pay principal or interest on Notes, covenant defaults, final maturity default or cross-acceleration with respect to material indebtedness and certain bankruptcy events. The gross proceeds from the Notes were deposited into a segregated escrow account with an escrow agent. The proceeds were released from escrow as of the KCG Closing Date and were used to finance, in part, the Acquisition of KCG, and to repay certain indebtedness of the Company and KCG. (See Note 3 for more details).

29


As described above, the Credit Agreement was amended on October 9, 2019, on which date VFH borrowed an additional $525.0 million of incremental first lien term loans, the proceeds of which were used together with cash on hand to redeem the Notes in full. The Indenture was fully terminated following such redemption.

Table of Contents


SBI Bonds


On July 25, 2016, VFH issued Japanese Yen Bonds (collectively the “SBI Bonds”) in the aggregate principal amount of ¥3.5 billion ($31.133.1 million at issuance date) to SBI Life Insurance Co., Ltd. and SBI Insurance Co., Ltd. The proceeds from the SBI Bonds were used to partially fund the investment in SBI Japannext Co., Ltd (as described in Note 10). The SBI Bonds were issued bearing interest at the rate per annum of 4.0% until their scheduled maturity on January 6, 2020.  Following the consummation of the Refinancing Transaction11 “Financial Assets and in accordance with the terms and conditions of the SBI Bonds, the rate per annum was increased to 5.0% as of October 2016.Liabilities”). The SBI Bonds are guaranteed by Virtu Financial. The SBI Bonds are subject to fluctuations on the Japanese Yen currency rates relative to the Company’s reporting currency (U.S. Dollar) with the changes reflected in other,Other, net in the condensed consolidated statementsCondensed Consolidated Statements of comprehensive income (loss).Comprehensive Income. In December 2019, the maturity date of the SBI Bonds was extended to January 2023. The principal balance was ¥3.5 billion $31.1($33.2 million) as of September 30, 20172020 and the¥3.5 billion ($32.2 million) as of December 31, 2019. The Company recorded a loss of $0.05$0.8 million and $1.5 million due to the change in currency rates during the nine months ended September 30, 2017 and 2016, respectively, and recorded a lossgain of $0.001 million and $1.5$0.1 million during the three months ended September 30, 20172020 and 2016, respectively.

Aggregate2019, respectively, and a loss of $1.0 million and a loss of $0.5 million during the nine months ended September 30, 2020 and 2019, respectively, due to changes in foreign currency rates.


As of September 30, 2020, aggregate future required minimum principal payments based on the terms of the long-term borrowings at September 30, 2017 were as follows:

 

 

 

 

 

(in thousands)

    

 

    

 

2017

 

$

 —

 

2018

 

 

 —

 

2019

 

 

 —

 

2020 and thereafter

 

 

1,481,108

 

Total principal of long-term borrowings

 

$

1,481,108

 


The below table contains a reconciliation

(in thousands)September 30, 2020
2020$0 
20210 
20220 
202333,182 
20240 
Thereafter1,636,512 
Total principal of long-term borrowings$1,669,694 

31
Table of the long term borrowings principal amount to the secured credit facility recorded in the condensed consolidated statements of financial condition:

Contents

 

 

 

 

 

 

 

 

 

 

 

At September 30,

 

 

At December 31,

 

(in thousands)

 

2017

 

2016

 

Senior secured first lien term loan outstanding principal

 

$

950,000

 

$

540,000

 

Senior secured second lien notes outstanding principal

 

 

500,000

 

 

 —

 

SBI Bonds outstanding principal

 

 

31,108

 

 

29,925

 

Net deferred financing fees

 

 

(45,237)

 

 

(4,012)

 

Net discount on senior secured credit facility

 

 

(1,242)

 

 

(956)

 

Long-term borrowings

 

$

1,434,629

 

$

564,957

 

10.11. Financial Assets and Liabilities

At September 30, 2017


Financial Instruments Measured at Fair Value

The fair value of equities, options, on-the-run U.S. government obligations and December 31, 2016, substantially all of the Company’s financial assetsexchange traded notes is estimated using recently executed transactions and liabilities, except for the long-term borrowings, short-term borrowings, securities borrowedmarket price quotations in active markets and loaned, and certain exchange memberships, which would all beare categorized as Level 2, were carried at fair value based on published market prices1 with the exception of inactively traded equities and certain other financial instruments, which are marked to market daily or were short-term in naturecategorized as Level 2. The Company’s corporate bonds, derivative contracts and were carried at amounts that approximate fair value. The Company determined that the carryingother U.S. and non-U.S. government obligations have been categorized as Level 2. Fair value of the Company’s long-term borrowings approximates fair value as of September 30, 2017 and December 31, 2016derivative contracts is based on the recent transaction dateindicative prices obtained from a number of banks and broker-dealers, as well as management’s own analyses. The indicative prices have been independently validated through the SBI BondsCompany’s risk management systems, which are designed to check prices with information independently obtained from exchanges and the quoted over-the-counter marketvenues where such financial instruments are listed or to compare prices provided by the issuer of the senior secured credit facility, and would be categorized as Level 2.

As of March 31, 2017, thesimilar instruments with similar maturities for listed financial futures in foreign exchange.


The Company began pricingprices certain financial instruments held for trading at fair value based on theoretical prices, which can differ from quoted market prices. The theoretical prices reflect price adjustments primarily caused by the fact that the Company continuously prices its financial instruments based on all available information. This information includes prices for identical and near-identical positions, as well as the prices for securities underlying the Company’s positions, on other exchanges that are open after the exchange on which the financial

30

Table of Contents

instruments is traded closes. The Company’s middle office departmentCompany validates that all price adjustments can be substantiated with market inputs and checks the theoretical prices independently. Consequently, such financial instruments are classified as Level 2. The Company concluded that this is a change in accounting estimate and no retrospective adjustments were necessary.

The fair value of equities, options, on-the-run U.S. government obligations and exchange traded notes is estimated using recently executed transactions and market price quotations in active markets and are categorized as Level 1 with the exception of inactively traded equities and certain financial instruments noted in the preceding paragraph which are categorized as Level 2. Fair value of the Company’s derivative contracts is based on the indicative prices obtained from broadly distributed bank and broker dealers, as well as management’s own analyses. The indicative prices have been independently validated through the Company’s risk management systems, which are designed to check prices with information independently obtained from exchanges and venues where such financial instruments are listed or to compare prices of similar instruments with similar maturities for listed financial futures in foreign exchange. At September 30, 2017 and December 31, 2016, the Company’s corporate bonds, derivative contracts and other U.S. and non-U.S. government obligations have been categorized as Level 2.

As described later in this footnote, the Company has a minority investment in SBI Japannext Co., Ltd, a proprietary trading system based in Tokyo (“SBI Japannext”). The Company elected the fair value option to account for this equity investment because it believes that fair value is the most relevant measurement attribute for this investment, as well as to reduce operational and accounting complexity. This investment has been categorized as Level 3. The valuation process involved for Level 3 measurements is completed on a quarterly basis. The Company employs two valuation methodologies when determining the fair value of investments categorized as Level 3, market comparable analysis and discounted cash flow analysis. The market comparable analysis considers key financial inputs, recent public and private transactions and other available measures. The discounted cash flow analysis incorporates significant assumptions and judgments and the estimates of key inputs used in this methodology include the discount rate for the investment and assumed inputs used to calculate terminal values, such as price/earnings multiples. Upon completion of the valuations conducted using these methodologies, a weighting is ascribed to each method and the ultimate fair value recorded for a particular investment will generally be within a range suggested by the two methodologies. When determining the weighting ascribed to each valuation methodology, the Company considers, among other factors, the availability of direct market comparables, the applicability of a discounted cash flow analysis and the expected holding period.

There were no transfers of financial instruments between levels during the three months and nine months ended September 30, 2017 and 2016.

31


32
Table of Contents

Fair value measurements for those items measured on a recurring basis are summarized below as of September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

Quoted Prices

 

Significant

 

 

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

Counterparty

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

and Cash

 

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

Collateral

 

Total Fair

 

(in thousands)

    

(Level 1) 

    

(Level 2) 

    

(Level 3) 

    

Netting 

    

Value 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments owned, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$

591,928

 

$

1,434,092

 

$

 —

 

$

 —

 

$

2,026,020

 

U.S. and Non-U.S. government obligations

 

 

2,783

 

 

21,002

 

 

 —

 

 

 —

 

 

23,785

 

Corporate Bonds

 

 

 —

 

 

83,532

 

 

 —

 

 

 —

 

 

83,532

 

Exchange traded notes

 

 

4,553

 

 

53,081

 

 

 —

 

 

 —

 

 

57,634

 

Currency forwards

 

 

 —

 

 

3,459,340

 

 

 —

 

 

(3,458,283)

 

 

1,057

 

Options

 

 

11,220

 

 

 —

 

 

 —

 

 

 —

 

 

11,220

 

 

 

$

610,484

 

$

5,051,047

 

$

 —

 

$

(3,458,283)

 

$

2,203,248

 

Financial instruments owned, pledged as collateral:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$

413,860

 

$

278,270

 

$

 —

 

$

 —

 

$

692,130

 

Exchange traded notes

 

 

520

 

 

6,502

 

 

 —

 

 

 —

 

 

7,022

 

 

 

$

414,380

 

$

284,772

 

$

 —

 

$

 —

 

$

699,152

 

Other Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investment

 

$

 —

 

$

 —

 

$

37,263

 

$

 —

 

$

37,263

 

Exchange stock

 

 

3,211

 

 

 —

 

 

 —

 

 

 —

 

 

3,211

 

Other(1)

 

 

 —

 

 

55,363

 

 

3,000

 

 

 —

 

 

58,363

 

 

 

$

3,211

 

$

55,363

 

$

40,263

 

$

 —

 

$

98,837

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments sold, not yet purchased, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$

895,116

 

$

1,470,863

 

$

 —

 

$

 —

 

$

2,365,979

 

U.S. and Non-U.S. government obligations

 

 

10,375

 

 

14,975

 

 

 —

 

 

 —

 

 

25,350

 

Corporate Bonds

 

 

 —

 

 

83,535

 

 

 

 

 

 —

 

 

83,535

 

Exchange traded notes

 

 

355

 

 

50,327

 

 

 —

 

 

 —

 

 

50,682

 

Currency forwards

 

 

 —

 

 

3,492,928

 

 

 —

 

 

(3,492,847)

 

 

81

 

Options

 

 

10,264

 

 

 —

 

 

 —

 

 

 —

 

 

10,264

 

 

 

$

916,110

 

$

5,112,628

 

$

 —

 

$

(3,492,847)

 

$

2,535,891

 

2020:

(1)

Other primarily consists of a $55.4 million receivable from Bats related to the sale of KCG Hotspot and $3.0 million receivable from the sale of an investment.


32

 September 30, 2020
(in thousands)Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Counterparty and Cash Collateral Netting Total Fair Value 
Assets     
Financial instruments owned, at fair value:     
Equity securities$547,871 $1,153,213 $0 $— $1,701,084 
U.S. and Non-U.S. government obligations177,614 35,772 0 — 213,386 
Corporate Bonds0 248,789 0 — 248,789 
Exchange traded notes49 17,888 0 — 17,937 
Currency forwards0 675,533 0 (662,412)13,121 
Options13,830 0 0 — 13,830 
 739,364 2,131,195 0 (662,412)2,208,147 
Financial instruments owned, pledged as collateral:
Equity securities285,893 313,457 0 — 599,350 
Exchange traded notes10 9,690 0 — 9,700 
 285,903 323,147 0 — 609,050 
Other Assets
Equity investment0 0 64,703 — 64,703 
Exchange stock2,102 0 0 — 2,102 
 2,102 0 64,703 — 66,805 
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equity securities$1,034,326.0 $1,259,762.0 $0 $— $2,294,088.0 
U.S. and Non-U.S. government obligations107,513 2,265 0 — 109,778 
Corporate Bonds0 365,871 0 — 365,871 
Exchange traded notes20 6,200 0 — 6,220 
Currency forwards0 654,666 0 (654,672)(6)
Options14,184 0 0 — 14,184 
 1,156,043 2,288,764 0 (654,672)2,790,135 
Payables to broker dealers and clearing organizations:
Interest rate swap0 69,355 0 — 69,355 

33
Table of Contents

Fair value measurements for those items measured on a recurring basis are summarized below as of December 31, 2016:

2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2016

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

Counterparty

 

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

and Cash

 

 

 

 

 

 

Assets

 

Inputs

 

Inputs

 

Collateral

 

Total Fair

 

(in thousands)

    

(Level 1) 

    

(Level 2) 

    

(Level 3) 

    

Netting 

    

Value 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments owned, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$

1,597,049

 

$

31,988

 

$

 —

 

$

 —

 

$

1,629,037

 

Non-U.S. government obligations

 

 

 —

 

 

10,765

 

 

 —

 

 

 —

 

 

10,765

 

Exchange traded notes

 

 

37,034

 

 

 —

 

 

 —

 

 

 —

 

 

37,034

 

Currency forwards

 

 

 —

 

 

1,147,261

 

 

 —

 

 

(1,140,239)

 

 

7,022

 

Options

 

 

 —

 

 

141

 

 

 —

 

 

 —

 

 

141

 

 

 

$

1,634,083

 

$

1,190,155

 

$

 —

 

$

(1,140,239)

 

$

1,683,999

 

Financial instruments owned, pledged as collateral:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$

128,202

 

$

 —

 

$

 —

 

$

 —

 

$

128,202

 

Exchange traded notes

 

 

15,681

 

 

 —

 

 

 —

 

 

 —

 

 

15,681

 

 

 

$

143,883

 

$

 —

 

$

 —

 

$

 —

 

$

143,883

 

Other Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investment

 

$

 —

 

$

 —

 

$

36,031

 

$

 —

 

$

36,031

 

Exchange stock

 

 

449

 

 

 —

 

 

 —

 

 

 —

 

 

449

 

 

 

$

449

 

$

 —

 

$

36,031

 

$

 —

 

$

36,480

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments sold, not yet purchased, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$

1,323,693

 

$

6,638

 

$

 —

 

$

 —

 

$

1,330,331

 

Exchange traded notes

 

 

18,744

 

 

 —

 

 

 —

 

 

 —

 

 

18,744

 

Currency forwards

 

 

 —

 

 

1,009,038

 

 

 —

 

 

(1,009,038)

 

 

 —

 

Options

 

 

 —

 

 

80

 

 

 —

 

 

 —

 

 

80

 

 

 

$

1,342,437

 

$

1,015,756

 

$

 —

 

$

(1,009,038)

 

$

1,349,155

 


 December 31, 2019
(in thousands)Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Counterparty and Cash Collateral Netting Total Fair Value 
Assets     
Financial instruments owned, at fair value:     
Equity securities$600,259 $1,080,518 $0 $— $1,680,777 
U.S. and Non-U.S. government obligations106,690 20,847 0 — 127,537 
Corporate Bonds0 171,591 0 — 171,591 
Exchange traded notes243 48,894 0 — 49,137 
Currency forwards0 242,552 0 (211,398)31,154 
Options8,538 0 0 — 8,538 
715,730 1,564,402 0 (211,398)2,068,734 
Financial instruments owned, pledged as collateral:
Equity securities362,439 291,927 0 — 654,366 
U.S. and Non-U.S. government obligations0 0 0 — 0 
Exchange traded notes12 42,578 — — 42,590 
362,451 334,505 0 — 696,956 
Other Assets
Equity investment0 0 46,245 — 46,245 
Exchange stock2,721 0 0 — 2,721 
2,721 0 46,245 — 48,966 
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equity securities1,022,814 1,163,888 0 — 2,186,702 
U.S. and Non-U.S. government obligations39,091 2,713 0 — 41,804 
Corporate Bonds0 244,700 0 — 244,700 
Exchange traded notes15 21,631 0 — 21,646 
Currency forwards0 196,554 0 (196,535)19 
Options3,087 0 0 — 3,087 
 $1,065,007 $1,629,486 $0 $(196,535)$2,497,958 
SBI Investment

The Company has a minority investment (the “SBI Investment”) in SBI Japannext Co., Ltd.

On July 27, 2016, the Company purchased an additional minority interest (29.4% (“SBI”), a proprietary trading system based in SBI Japannext for $38.8 million in cash (“SBI Investment”).Tokyo. In connection with the SBI Investment, VFHthe Company issued bonds to certain affiliates ofthe SBI JapannextBonds (as described in Note 10 “Borrowings”) and used the proceeds to partially finance the transaction (see Note 9).

transaction. The SBI Investment is included within Level 3 of the fair value hierarchy. As of September 30, 2017, the Company determined2020, the fair value of the SBI Investment was determined using a weighted average of valuations using 1) the discounted cash flow method, an income approach, with the discount rate of 15.9% applied to the cash flow forecasts. The Company also usedapproach; 2) a market approach based on 19x average price/earnings multiplesenterprise value/EBITDA ratios of comparable companiescompanies; and to corroborate the income approach. The fair valuea lesser extent 3) a transaction approach based on transaction values of the SBI Investment at December 31, 2016 was determined to approximate the purchase price paid for the SBI Investment, adjusted for the changes in the Japanese Yen currency rate, given the proximity to the transaction date and lack of significant events subsequent to the transaction date.comparable companies. The fair value measurement is highly sensitive to significant changes in the unobservable inputs, and significant increases (decreases) in discount rate or decreases (increases) in price/earningsenterprise value/EBITDA multiples would result in a significantly lower (higher) fair value measurement.


34
Table of Contents
The table below presents information on the valuation techniques, significant unobservable inputs and their ranges for the SBI Investment:

September 30, 2020
(in thousands)Fair ValueValuation TechniqueSignificant Unobservable InputRangeWeighted Average
Equity investment$64,703 Discounted cash flowEstimated revenue growth(7.6)% - 20.0%7.6 %
Discount rate14.4% - 14.4%14.4 %
MarketFuture enterprise value/ EBIDTA ratio12.9x - 22.7x16.9x

Changes in the fair value of the SBI Investment are reflected in other,included within Other, net in the condensed consolidated statementsCondensed Consolidated Statements of comprehensive income (loss).

Receivable from Bats Global Markets, Inc. (“Bats”)

In March 2015, KCG sold KCG Hotspot, an institutional spot foreign exchange ECN, to Bats, which is now a subsidiary of CBOE Holdings, Inc.  KCG and Bats agreed to share certain tax benefits, which as of September 30, 2017 comprise a $50.0 million payment and an annual payment of up to $6.6 million, both of which are due in April 2018. The $6.8 million annual payment is contingent on Bats (and CBOE) generating sufficient taxable net income to receive the tax benefits.

Comprehensive Income.

33


Table of Contents

The Company has elected the fair value option related to the receivable from Bats and considers the receivable to be a Level 2 asset in the fair value hierarchy as the fair value is derived from observable significant inputs such as contractual cash flows and market discount rates. The remaining additional potential payments of $56.8 million are recorded at a fair value of $55.4 million in Other assets on the condensed consolidated statements of financial condition as of September 30, 2017.

The following presents the changes in the Company's Level 3 financial instruments measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Change in Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/ (Losses) on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

Balance at

 

 

 

Total Realized

 

Net Transfers

 

Balance at

 

still held at

 

 

December 31,

 

 

 

and Unrealized

 

into (out of)

 

September 30,

 

September 30,

(in thousands)

 

2016

 

Purchases

 

Gains / (Losses)

 

Level 3

 

2017

 

2017

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investment

 

$

36,031

 

$

 —

 

$

1,232

 

$

 —

 

$

37,263

 

$

1,232

Other

 

 

 —

 

 

3,000

 

 

 —

 

 

 —

 

 

3,000

 

 

 —

Total

 

$

36,031

 

$

3,000

 

$

1,232

 

$

 —

 

$

40,263

 

$

1,232


Three Months Ended September 30, 2020
(in thousands)Balance at June 30, 2020PurchasesTotal Realized and Unrealized Gains / (Losses) (1)Net Transfers into (out of) Level 3SettlementBalance at September 30, 2020Change in Net Unrealized Gains / (Losses) on Investments still held at September 30, 2020
Assets
Other assets:
Equity investment$51,599 $0 $13,104 $0 $0 $64,703 $13,104 
Total$51,599 $0 $13,104 $0 $0 $64,703 $13,104 
(1) Total realized and unrealized gains/(losses) includes gains and losses realized on the SBI Bonds (see Note 10 “Borrowings” for more details) due to fluctuations in currency rates as well as gains and losses recognized on changes in the fair value of the SBI Investment.

Three Months Ended September 30, 2019
(in thousands)Balance at June 30, 2019PurchasesTotal Realized and Unrealized Gains / (Losses)Net Transfers into (out of) Level 3SettlementBalance at September 30, 2019Change in Net Unrealized Gains / (Losses) on Investments still held at September 30, 2019
Assets
Other assets:
Equity investment$46,351 $0 $(71)$0 $0 $46,280 $(71)
Total$46,351 $0 $(71)$0 $0 $46,280 $(71)
35
Table of Contents

Nine Months Ended September 30, 2020
(in thousands)Balance at December 31, 2019PurchasesTotal Realized and Unrealized Gains / (Losses) (1)Net Transfers into (out of) Level 3SettlementBalance at September 30, 2020Change in Net Unrealized Gains / (Losses) on Investments still held at September 30, 2020
Assets
Other assets:
Equity investment$46,245 $0 $18,458 $0 $0 $64,703 $18,458 
Total$46,245 $0 $18,458 $0 $0 $64,703 $18,458 
(1) Total realized and unrealized gains/(losses) includes gains and losses realized on the SBI Bonds (see Note 10 “Borrowings” for more details) due to fluctuations in currency rates as well as gains and losses recognized on changes in the fair value of the SBI Investment.
Nine Months Ended September 30, 2019
(in thousands)Balance at December 31, 2018PurchasesTotal Realized and Unrealized Gains / (Losses)Net Transfers into (out of) Level 3SettlementBalance at September 30, 2019Change in Net Unrealized Gains / (Losses) on Investments still held at September 30, 2019
Assets
Other assets:
Equity investment$45,856 $0 $424 $0 $0 $46,280 $424 
Total$45,856 $0 $424 $0 $0 $46,280 $424 

Financial Instruments Not Measured at Fair Value

The table below presents the carrying value, fair value and fair value hierarchy category of certain financial instruments that are not measured at fair value on the Condensed Consolidated Statement of Financial Condition. The table below excludes non-financial assets and liabilities. The carrying value of financial instruments not measured at fair value categorized in the fair value hierarchy as Level 1 and Level 2 approximates fair value due to the relatively short-term nature of the underlying assets. The fair value of the Company’s long-term borrowings is based on quoted prices from the market for similar instruments, and is categorized as Level 2 in the fair value hierarchy.

36
Table of Contents
The table below summarizes financial assets and liabilities not carried at fair value on a recurring basis as of September 30, 2020:
 September 30, 2020
 Carrying Value Quoted Prices in Active Markets for Identical AssetsSignificant Other Observable InputsSignificant Unobservable Inputs
 (in thousands)
Fair Value(Level 1) (Level 2) (Level 3) 
Assets     
Cash and cash equivalents$567,677 $567,677 $567,677 $0 $0 
Cash restricted or segregated under regulations and other98,285 98,285 98,285 0 0 
Securities borrowed1,325,843 1,325,843 0 1,325,843 0 
Securities purchased under agreements to resell17,413 17,413 0 17,413 0 
Receivables from broker-dealers and clearing organizations1,881,881 1,881,881 481,664 1,400,217 0 
Receivables from customers$176,939 $176,939 $0 $176,939 $0 
Total Assets4,068,038 4,068,038 1,147,626 2,920,412 0 
Liabilities
Short-term borrowings123,993 124,974 0 124,974 0 
Long-term borrowings1,636,829 1,663,556 0 1,663,556 0 
Securities loaned705,789 705,789 0 705,789 0 
Securities sold under agreements to repurchase466,995 466,995 0 466,995 0 
Payables to broker-dealers and clearing organizations (1)675,032 675,032 (1,804)676,836 0 
Payables to customers141,980 141,980 0 141,980 0 
Total Liabilities$3,750,618 $3,778,326 $(1,804)$3,780,130 $0 
(1) Payables to broker-dealers and clearing organizations includes interest rate swap carried at fair value.

The table below summarizes financial assets and liabilities not carried at fair value on a recurring basis as of December 31, 2019:
 December 31, 2019
 Carrying Value Quoted Prices in Active Markets for Identical AssetsSignificant Other Observable InputsSignificant Unobservable Inputs
 (in thousands)
Fair Value(Level 1) (Level 2) (Level 3) 
Assets     
Cash and cash equivalents$732,164 $732,164 $732,164 $0 $0 
Cash restricted or segregated under regulations and other41,116 41,116 41,116 0 0 
Securities borrowed1,928,763 1,928,763 0 1,928,763 0 
Securities purchased under agreements to resell143,032 143,032 0 143,032 0 
Receivables from broker-dealers and clearing organizations1,318,584 1,318,584 40,842 1,277,742 0 
Total Assets4,163,659 4,163,659 814,122 3,349,537 0 
Liabilities
Short-term borrowings73,486 75,586 0 75,586 0 
Long-term borrowings1,917,866 1,966,850 0 1,966,850 0 
Securities loaned1,600,099 1,600,099 0 1,600,099 0 
Securities sold under agreements to repurchase340,742 340,742 0 340,742 0 
Payables to broker dealer and clearing organizations826,750 826,750 49,514 777,236 0 
Total Liabilities$4,758,943 $4,810,027 $49,514 $4,760,513 $0 
37
Table of Contents

Offsetting of Financial Assets and Liabilities


The Company does not net securities borrowed and securities loaned, or securities purchased under agreements to resell and securities sold under agreements to repurchase. These financial instruments are presented on a gross basis in the condensed consolidated statementsCondensed Consolidated Statements of financial condition.Financial Condition. In the tables below, the amounts of financial instruments owned that are not offset in the condensed consolidated statementsCondensed Consolidated Statements of financial condition,Financial Condition, but could be netted against financial liabilities with specific counterparties under legally enforceable master netting agreements in the event of default, are presented to provide financial statement readers with the Company’s estimate of its net exposure to counterparties for these financial instruments.


The following tables set forth the gross and net presentation of certain financial assets and financial liabilities as of September 30, 20172020 and December 31, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Amounts of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts

 

Assets Presented

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offset in the

 

in the

 

Gross Amounts Not Offset In the

 

 

 

 

 

 

Gross Amounts 

 

Consolidated

 

Consolidated

 

Statement of Financial Condition 

 

 

 

 

 

 

of Recognized

 

Statement of

 

Statement of

 

Financial

 

Cash Collateral

 

 

 

(in thousands)

  

Assets 

  

Financial Condition

  

Financial Condition

  

Instruments 

  

Received 

  

Net Amount 

 

Offsetting of Financial Assets:

  

 

    

  

 

    

  

 

    

  

 

    

  

 

    

  

 

    

 

Securities borrowed

 

$

1,525,403

 

$

 —

 

$

1,525,403

 

$

(1,480,267)

 

$

(844)

 

$

44,292

 

Securities purchased under agreements to resell

 

 

8,249

 

 

 —

 

 

8,249

 

 

(8,188)

 

 

 —

 

 

61

 

Trading assets, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

 

Currency forwards

 

 

3,459,340

 

 

(3,458,283)

 

 

1,057

 

 

 —

 

 

 —

 

 

1,057

 

Options

 

 

11,220

 

 

 —

 

 

11,220

 

 

(505)

 

 

 —

 

 

10,715

 

Total

 

$

5,004,212

 

$

(3,458,283)

 

$

1,545,929

 

$

(1,488,960)

 

$

(844)

 

$

56,125

 

2019:

34


 September 30, 2020
 Gross Amounts of Recognized AssetsGross Amounts Offset in the Condensed Consolidated Statement of Financial ConditionNet Amounts of Assets Presented in the Condensed Consolidated Statement of Financial Condition 
 Gross Amounts Not Offset in the Condensed Consolidated Statement of Financial Condition
(in thousands)Financial InstrumentsCounterparty Netting/ Cash CollateralNet Amount
Offsetting of Financial Assets:                        
Securities borrowed$1,325,843 $— $1,325,843 $(1,288,866)$(8,622)$28,355 
Securities purchased under agreements to resell17,413 — 17,413 (17,397)0 16 
Trading assets, at fair value:
Currency forwards675,533 (662,412)13,121 0 0 13,121 
Options13,830 0 13,830 0 (13,830)0 
Total$2,032,619 $(662,412)$1,370,207 $(1,306,263)$(22,452)$41,492 
 Gross Amounts of Recognized LiabilitiesGross Amounts Offset in the Condensed Consolidated Statement of Financial ConditionNet Amounts of Liabilities Presented in the Condensed Consolidated Statement of Financial Condition 
 Gross Amounts Not Offset in the Condensed Consolidated Statement of Financial Condition 
(in thousands)Financial Instruments Counterparty Netting/ Cash CollateralNet Amount 
Offsetting of Financial Liabilities:                     
Securities loaned$705,789 $— $705,789 $(688,932)$(8,622)$8,235 
Securities sold under agreements to repurchase466,995 — 466,995 (466,835)0 160 
Payable to broker-dealers and clearing organizations
Interest rate swaps69,355 0 69,355 0 (68,897)458 
Trading liabilities, at fair value:
Currency forwards654,666 (654,672)(6)0 0 (6)
Options14,184 0 14,184 0 (13,830)354 
Total$1,910,989 $(654,672)$1,256,317 $(1,155,767)$(91,349)$9,201 

38
Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Amounts of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts

 

Liabilities Presented

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offset in the

 

in the

 

Gross Amounts Not Offset In the

 

 

 

 

 

 

Gross Amounts 

 

Consolidated

 

Consolidated

 

Statement of Financial Condition 

 

 

 

 

 

 

of Recognized

 

Statement of

 

Statement of

 

Financial

 

Cash Collateral

 

 

 

 

  

Liabilities

  

Financial Condition

  

Financial Condition

  

Instruments 

  

Pledged

  

Net Amount 

 

Offsetting of Financial Liabilities:

  

 

    

  

 

 

  

 

    

  

 

    

  

 

    

  

 

    

 

Securities loaned

 

$

582,915

 

$

 —

 

$

582,915

 

$

(574,885)

 

$

 —

 

$

8,030

 

Securities sold under agreements to repurchase

 

 

620,887

 

 

 —

 

 

620,887

 

 

(620,887)

 

 

 —

 

 

 —

 

Trading liabilities, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

 

Currency forwards

 

 

3,492,928

 

 

(3,492,847)

 

 

81

 

 

 —

 

 

 —

 

 

81

 

Options

 

 

10,264

 

 

 —

 

 

10,264

 

 

(505)

 

 

 —

 

 

9,759

 

Total

 

$

4,706,994

 

$

(3,492,847)

 

$

1,214,147

 

$

(1,196,277)

 

$

 —

 

$

17,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Amounts of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts

 

Assets Presented

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offset in the

 

in the

 

Gross Amounts Not Offset In the

 

 

 

 

 

  

Gross Amounts 

 

Consolidated

 

Consolidated

 

Statement of Financial Condition 

 

 

 

 

 

  

of Recognized

 

Statement of

 

Statement of

 

Financial

 

Cash Collateral

 

 

 

(in thousands)

 

Assets 

  

Financial Condition

  

Financial Condition

  

Instruments 

  

Received 

  

Net Amount 

 

Offsetting of Financial Assets:

  

 

    

  

 

    

  

 

    

  

 

    

  

 

    

  

 

    

 

Securities borrowed

 

$

220,005

 

$

 —

 

$

220,005

 

$

(216,778)

 

$

(248)

 

$

2,979

 

Trading assets, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency forwards

 

 

1,147,261

 

 

(1,140,239)

 

 

7,022

 

 

 —

 

 

 —

 

 

7,022

 

Options

 

 

141

 

 

 —

 

 

141

 

 

(80)

 

 

(13)

 

 

48

 

Total

 

$

1,367,407

 

$

(1,140,239)

 

$

227,168

 

$

(216,858)

 

$

(261)

 

$

10,049

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Amounts of

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts

 

Presented

 

Gross Amounts Not Offset In the

 

 

 

 

 

 

 

 

 

Offset in the

 

in the

 

Consolidated

 

 

 

 

 

 

 

 

 

Condensed

 

Condensed

 

Condensed Consolidated

 

 

 

 

 

 

Gross Amounts 

 

Consolidated

 

Consolidated

 

Statement of Financial Condition 

 

 

 

 

 

  

of Recognized

 

Statement of

 

Statement of

 

Financial

 

Cash Collateral

 

 

 

(in thousands)

  

Liabilities

  

Financial Condition

  

Financial Condition

  

Instruments 

  

Pledged

  

Net Amount 

 

Offsetting of Financial Liabilities:

  

 

    

  

 

 

  

 

    

  

 

    

  

 

    

  

 

    

 

Securities loaned

 

$

222,203

 

$

 —

 

$

222,203

 

$

(221,792)

 

$

 —

 

$

411

 

Trading liabilities, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency forwards

 

 

1,009,038

 

 

(1,009,038)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Options

 

 

80

 

 

 —

 

 

80

 

 

(80)

 

 

 —

 

 

 —

 

Total

 

$

1,231,321

 

$

(1,009,038)

 

$

222,283

 

$

(221,872)

 

$

 —

 

$

411

 

Excluded from the fair value and offsetting tables above is net unsettled fair value on long and short futures contracts in the amounts of $89.3 million and $18.0 million, which are included within receivables from broker-dealers and clearing organizations as of September 30, 2017 and December 31, 2016, respectively, and $(50.4) million and $(3.5) million, which are included within payables to broker-dealers and clearing organizations as of September 30, 2017 and December 31, 2016, respectively, and would be categorized as Level 1.

 December 31, 2019
 Gross Amounts of Recognized AssetsGross Amounts Offset in the Consolidated Statement of Financial ConditionNet Amounts of Assets Presented in the Consolidated Statement of Financial Condition 
 Gross Amounts Not Offset in the Consolidated Statement of Financial Condition 
(in thousands)Financial Instruments Counterparty Netting/ Cash CollateralNet Amount 
Offsetting of Financial Assets:                        
Securities borrowed$1,928,763 $— $1,928,763 $(1,881,005)$(15,280)$32,478 
Securities purchased under agreements to resell143,032 — 143,032 (142,922)0 110 
Trading assets, at fair value:
Currency forwards242,552 (211,398)31,154 0 0 31,154 
Options8,538 0 8,538 (8,537)0 1 
Total$2,322,885 $(211,398)$2,111,487 $(2,032,464)$(15,280)$63,743 

35


 Gross Amounts of Recognized LiabilitiesGross Amounts Offset in the Consolidated Statement of Financial ConditionNet Amounts of Liabilities Presented in the Consolidated Statement of Financial Condition 
 Gross Amounts Not Offset in the Consolidated Statement of Financial Condition  
(in thousands)Financial Instruments Counterparty Netting/ Cash CollateralNet Amount 
Offsetting of Financial Liabilities:                     
Securities loaned$1,600,099 $— $1,600,099 $(1,552,146)$(15,281)$32,672 
Securities sold under agreements to repurchase340,742 — 340,742 (340,718)0 24 
Trading liabilities, at fair value:
Currency forwards196,554 (196,535)19 0 0 19 
Options3,087 0 3,087 (3,087)0 0 
Total$2,140,482 $(196,535)$1,943,947 $(1,895,951)$(15,281)$32,715 

Table of Contents

The following table presents gross obligations for securities sold under agreements to repurchase and for securities lending transactions by remaining contractual maturity and the class of collateral pledged.

pledged:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

Remaining Contractual Maturity

 

 

Overnight and

 

Less than

 

30 - 60

 

61 - 90

 

 

(in thousands)

 

Continuous

 

30 days

 

days

 

Days

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$

 —

 

$

205,000

 

$

175,000

 

$

240,000

 

$

620,000

U.S. and Non-U.S. government obligations

 

 

887

 

 

 —

 

 

 —

 

 

 —

 

 

887

Total

 

$

887

 

$

205,000

 

$

175,000

 

$

240,000

 

$

620,887

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities lending transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$

582,915

 

$

 —

 

$

 —

 

$

 —

 

$

582,915

Total

 

$

582,915

 

$

 —

 

$

 —

 

$

 —

 

$

582,915


i

11.

 September 30, 2020
Remaining Contractual Maturity
(in thousands)Overnight and ContinuousLess than 30 days30 - 60
days		61 - 90
Days		Greater than 90
days		Total
Securities sold under agreements to repurchase:
Equity securities$50,000 $75,000 $50,000 $150,000 $50,000 $375,000 
U.S. and Non-U.S. government obligations91,995 91,995 
Total141,995 75,000 50,000 150,000 50,000 466,995 
Securities loaned:
Equity securities705,789 0 0 0 0 705,789 
Total$705,789 $0 $0 $0 $0 $705,789 

39
Table of Contents
 December 31, 2019
 Remaining Contractual Maturity
(in thousands)Overnight and ContinuousLess than 30 days30 - 60
days		61 - 90
Days		Greater than 90
days		Total
Securities sold under agreements to repurchase:     
Equity securities$0 $75,000 $50,000 $150,000 $0 $275,000 
U.S. and Non-U.S. government obligations65,742 0 0 0 0 65,742 
Total65,742 75,000 50,000 150,000 0 340,742 
Securities loaned:
Equity securities1,600,099 0 0 0 0 1,600,099 
Total$1,600,099 $0 $0 $0 $0 $1,600,099 

12. Derivative Instruments


The fair value of the Company’s derivative instruments on a gross basis consisted of the following at September 30, 20172020 and December 31, 2016:

2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

September 30, 2017

 

December 31, 2016

 

Derivatives Assets        

    

Balance Sheet Classification

    

Fair Value

    

Notional

    

Fair Value

    

Notional

 

Equities futures

 

Receivables from broker dealers and clearing organizations

 

$

(2,729)

 

$

951,330

 

$

2,403

 

$

1,461,286

 

Commodity futures       

 

Receivables from broker dealers and clearing organizations

 

 

50,258

 

 

18,078,494

 

 

13,964

 

 

3,918,778

 

Currency futures

 

Receivables from broker dealers and clearing organizations

 

 

41,826

 

 

3,789,287

 

 

1,591

 

 

3,264,093

 

Fixed income futures

 

Receivables from broker dealers and clearing organizations

 

 

(54)

 

 

32,723

 

 

31

 

 

5,730

 

Options

 

Financial instruments owned

 

 

11,220

 

 

1,122,415

 

 

141

 

 

6,844

 

Currency forwards

 

Financial instruments owned

 

 

3,459,340

 

 

159,559,280

 

 

1,147,261

 

 

94,192,414

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Liabilities

    

Balance Sheet Classification

    

Fair Value

    

Notional

    

Fair Value

    

Notional

 

(in thousands)(in thousands) September 30, 2020December 31, 2019
Derivatives AssetsDerivatives AssetsFinancial Statements LocationFair ValueNotionalFair ValueNotional
Derivative instruments not designated as hedging instruments:Derivative instruments not designated as hedging instruments:    

Equities futures

 

Payables to broker dealers and clearing organizations

 

$

(731)

 

$

107,774

 

$

(43)

 

$

62,417

 

Equities futuresReceivables from broker-dealers and clearing organizations$(524)$1,038,860 $(1,366)$4,502,017 

Commodity futures

 

Payables to broker dealers and clearing organizations

 

 

(35,301)

 

 

724,829

 

 

2,842

 

 

22,616,170

 

Commodity futuresReceivables from broker-dealers and clearing organizations483,476 8,293,464 40,656 7,758,974 

Currency futures

 

Payables to broker dealers and clearing organizations

 

 

(14,425)

 

 

2,988,821

 

 

(6,282)

 

 

1,137,908

 

Currency futuresReceivables from broker-dealers and clearing organizations(4,443)1,601,070 (2,860)1,116,246 

Treasury futures

 

Payables to broker dealers and clearing organizations

 

 

11

 

 

7,906

 

 

 —

 

 

 —

 

Fixed income futuresFixed income futuresReceivables from broker-dealers and clearing organizations(221)666,668 47 155,697 

Options

 

Financial instruments sold, not yet purchased

 

 

10,264

 

 

1,108,920

 

 

80

 

 

4,486

 

OptionsFinancial instruments owned13,830 814,419 8,538 442,808 

Currency forwards

 

Financial instruments sold, not yet purchased

 

 

3,492,928

 

 

159,585,203

 

 

1,009,038

 

 

85,874,684

 

Currency forwardsFinancial instruments owned675,533 30,360,772 242,552 24,369,818 
Interest rate swapInterest rate swapOther assets0 0 8,976 525,000 
Derivatives LiabilitiesDerivatives LiabilitiesFinancial Statements LocationFair ValueNotionalFair ValueNotional
Derivative instruments not designated as hedging instruments:Derivative instruments not designated as hedging instruments:    
Equities futuresEquities futuresPayables to broker-dealers and clearing organizations$(239)$62,069 $751 $83,803 
Commodity futuresCommodity futuresPayables to broker-dealers and clearing organizations1,456 81,624 (45,175)3,604,979 
Currency futuresCurrency futuresPayables to broker-dealers and clearing organizations7,895 2,199,582 (23,223)6,594,991 
Fixed income futuresFixed income futuresPayables to broker-dealers and clearing organizations(2)2,680 94 190,938 
OptionsOptionsFinancial instruments sold, not yet purchased14,184 806,832 3,087 436,422 
Currency forwardsCurrency forwardsFinancial instruments sold, not yet purchased654,666 30,350,339 196,554 24,346,818 
Derivative instruments designated as hedging instruments:Derivative instruments designated as hedging instruments:
Interest rate swapsInterest rate swapsPayables to broker-dealers and clearing organizations69,355 1,525,000 0 0 


Amounts included in receivables from and payables to broker-dealers and clearing organizations represent net variation margin on long and short futures contracts.

contracts as well as amounts receivable or payable on interest rate swaps.


40
Table of Contents
The following table summarizes the net gain (loss) from derivative instruments not designated as hedging instruments under ASC 815, which are recorded in tradingtotal revenues, and from those designated as hedging instruments under ASC 815, which are recorded in other comprehensive income net in the accompanying condensed consolidated statementsCondensed Consolidated Statements of comprehensive income (loss)Comprehensive Income for the three and nine months ended September 30, 20172020 and 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

 

September 30, 

 

September 30, 

 

 

(in thousands)

    

2017

    

2016

    

2017

    

2016

    

 

Futures

 

$

35,097

 

$

197,650

 

$

249,274

 

$

618,245

 

 

Currency forwards

 

 

8,950

 

 

(52,796)

 

 

3,135

 

 

(37,076)

 

 

Options

 

 

21,120

 

 

(65)

 

 

21,119

 

 

(411)

 

 

Others

 

 

125

 

 

(2)

 

 

125

 

 

 2

 

 

 

 

$

65,292

 

$

144,787

 

$

273,653

 

$

580,760

 

 

2019.

36

  Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)Financial Statements Location2020201920202019
Derivative instruments not designated as hedging instruments:  
FuturesTrading income, net$(12,262)$(109,912)$11,440 $45,698 
Currency forwardsTrading income, net62,465 38,738 255,044 (6,304)
OptionsTrading income, net35,343 (8,735)61,643 (3,737)
Interest rate swap on term loanOther, net(1,417)0 (1,417)0 
$84,129 $(79,909)$326,710 $35,657 
Derivative instruments designated as hedging instruments:
Interest rate swaps (1)Other comprehensive income$314 $0 $(64,425)$0 

(1) On January 29, 2020, the Company entered into a five-year $1,000 million floating-to-fixed interest rate swap agreement. The Company also previously entered into a five-year $525 million floating-to-fixed interest rate swap agreement in the fourth quarter of 2019. These 2 interest rate swaps met the criteria to be considered qualifying cash flow hedges under ASC 815, and as such, the mark-to-market gains (losses) on the instruments were recorded within Other comprehensive income on the Condensed Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2020.

13. Revenues from Contracts with Customers

Revenue Recognition

The Company adopted ASC Topic 606, Revenue from Contracts with Customers, as of January 1, 2018 in the condensed consolidated financial statements by applying the modified retrospective method. The Company’s revenue recognition methods for its contracts with customers prior to the adoption of Topic 606 are consistent with its methods after the adoption of Topic 606.

Commissions, net. The Company earns commission revenue by acting as an agent on behalf of customers. The Company’s performance obligations consist of trade execution and clearing services and are satisfied on the trade date; accordingly, commission revenues are recorded on the trade date. Commission revenues are paid on settlement date; therefore, a receivable is recognized as of the trade date. Under a commission management program, the Company allows institutional clients to allocate a portion of their gross commissions to pay for research and other services provided by third parties. As the Company acts as an agent in these transactions, it records such expenses on a net basis within Commissions, net and technology services in the Condensed Consolidated Statements of Comprehensive Income.

Workflow technology. Through its front-end workflow solutions and network capabilities, the Company provides order and trade execution management and order routing services.

The Company provides trade order routing from its execution management system (“EMS”) to its execution services offerings, with each trade order routed through the EMS representing a separate performance obligation that is satisfied at a point in time. Commissions earned are fixed and revenue is recognized on the trade date. A portion of the commissions earned on the trade is then allocated to workflow technology based on the stand-alone selling price paid by third-party brokers for order routing. The remaining commission is allocated to commissions, net using a residual allocation approach.

The Company participates in commission share arrangements, where trade orders are routed to third-party brokers from its EMS and its order management system (“OMS”). Commission share revenues from third-party brokers are generally fixed and revenue is recognized at a point in time on the trade date.

The Company provides OMS and related software products and connectivity services to customers and recognizes license fee revenues and monthly connectivity fees. License fee revenues, generated for the use of the Company’s OMS and other software products, is fixed and recognized at the point in time at which the customer is able to use and benefit from the license. Connectivity revenue is variable in nature, based on the number of live connections, and is recognized over time on a monthly basis using a time-based measure of progress.

41
Table of Contents

12. Income Taxes

SubsequentAnalytics. The Company provides customers with analytics products and services, including trading and portfolio analytics tools. The Company provides analytics products and services to customers and recognizes subscription fees, which are fixed for the contract term, based on when the products and services are delivered. Analytics services can be delivered either over time (when customers are provided with distinct ongoing access to analytics data) or at a point in time (when reports are only delivered to the consummationcustomer on a periodic basis). Over time performance obligations are recognized using a time-based measure of progress on a monthly basis, since the analytics products and services are continually provided to the client. Point in time performance obligations are recognized when the analytics reports are delivered to the client.


Analytics products and services can also be paid for through variable bundled arrangements with trade execution services. Customers agree to pay for analytics products and services with commissions generated from trade execution services, and commissions are allocated to the analytics performance obligation(s) using:
(i)the commission value for each customer for the products and services it receives, which is priced using the value for similar stand-alone subscription arrangements; and
(ii)a calculated ratio of the Reorganization Transactionscommission value for the products and services relative to the IPO,total amount of commissions generated from the customer.

For these bundled commission arrangements, the allocated commissions to each analytics performance obligation are then recognized as revenue when the analytics product is delivered, either over time or at a point in time. These allocated commissions may be deferred if the allocated amount exceeds the amount recognizable based on delivery.

Disaggregation of Revenues

The following tables present the Company’s revenue from contracts with customers disaggregated by the services described above, by timing of revenue recognition, reconciled to the Company’s segments, for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30, 2020
(in thousands)Market MakingExecution ServicesCorporateTotal
Revenues from contracts with customers:
Commissions, net$9,391 $91,460 $0 $100,851 
Workflow technology0 23,044 0 23,044 
Analytics0 9,958 0 9,958 
Total revenue from contracts with customers9,391 124,462 0 133,853 
Other sources of revenue465,207 58,218 (1,166)522,259 
Total revenues474,598 182,680 (1,166)656,112 
Timing of revenue recognition:
Services transferred at a point in time474,598 164,018 (1,166)637,450 
Services transferred over time0 18,662 0 18,662 
Total revenues$474,598 $182,680 $(1,166)$656,112 

42
Table of Contents
Three Months Ended September 30, 2019
(in thousands)Market MakingExecution ServicesCorporateTotal
Revenues from contracts with customers:
Commissions, net$7,252 $98,365 $0 $105,617 
Workflow technology0 24,041 0 24,041 
Analytics0 9,969 0 9,969 
Total revenue from contracts with customers7,252 132,375 0 139,627 
Other sources of revenue242,550 1,430 (1,267)242,713 
Total revenues249,802 133,805 (1,267)382,340 
Timing of revenue recognition:
Services transferred at a point in time249,802 114,300 (1,267)362,835 
Services transferred over time0 19,505 0 19,505 
Total revenues$249,802 $133,805 $(1,267)$382,340 
Nine Months Ended September 30, 2020
(in thousands)Market MakingExecution ServicesCorporateTotal
Revenues from contracts with customers:
Commissions, net$9,526 $333,823 $0 $343,349 
Workflow technology0 78,376 0 78,376 
Analytics0 30,608 0 30,608 
Total revenue from contracts with customers9,526 442,807 0 452,333 
Other sources of revenue2,054,774 57,814 (2,286)2,110,302 
Total revenues2,064,300 500,621 (2,286)2,562,635 
Timing of revenue recognition:
Services transferred at a point in time2,064,300 444,683 (2,286)2,506,697 
Services transferred over time0 55,938 0 55,938 
Total revenues$2,064,300 $500,621 $(2,286)$2,562,635 

Nine Months Ended September 30, 2019
(in thousands)Market MakingExecution ServicesCorporateTotal
Revenues from contracts with customers:
Commissions, net$17,213 $259,846 $0 $277,059 
Workflow technology0 58,369 0 58,369 
Analytics0 24,466 24,466 
Total revenue from contracts with customers17,213 342,681 0 359,894 
Other sources of revenue744,863 15,644 (2,528)757,979 
Total revenues762,076 358,325 (2,528)1,117,873 
Timing of revenue recognition:
Services transferred at a point in time762,076 311,772 (2,528)1,071,320 
Services transferred over time0 46,553 0 46,553 
Total revenues$762,076 $358,325 $(2,528)$1,117,873 
43
Table of Contents

Remaining Performance Obligations and Revenue Recognized from Past Performance Obligations

As of September 30, 2020, the aggregate amount of the transaction price allocated to the performance obligations relating to technology services, workflow technology, and analytics revenues that are unsatisfied (or partially unsatisfied) was not material.

The Company recognized $0.6 million and $0.3 million of revenue related to performance obligations satisfied in previous period for the three months ended September 30, 2020 and 2019, respectively.

Contract Assets and Contract Liabilities

The timing of the revenue recognition may differ from the timing of payment from customers. The Company records a receivable when revenue is recognized prior to payment, and when the Company has an unconditional right to payment. The Company records a contract liability when payment is received prior to the time at which the satisfaction of the service obligation occurs.

Receivables related to revenues from contracts with customers amounted to $54.0 million and $53.6 million as of September 30, 2020 and December 31, 2019, respectively. The Company did not identify any contract assets. There were 0 impairment losses on receivables as of September 30, 2020.

Deferred revenue primarily relates to deferred commissions allocated to analytics products and subscription fees billed in advance of satisfying the performance obligations. Deferred revenue related to contracts with customers was $7.6 million and $8.6 million as of September 30, 2020 and December 31, 2019, respectively. The Company recognized revenue of $8.6 million and $8.1 million for the three months ended September 30, 2020 and 2019, respectively, and $23.6 million and $23.1 million for the nine months ended September 30, 2020 and 2019, respectively that had been initially recorded as deferred revenue.

The Company has not identified any costs to obtain or fulfill its contracts under ASC 606.

14. Income Taxes

The Company is subject to U.S. federal, state and local income tax at the rate applicable to corporations less the rate attributable to the noncontrolling interest in Virtu Financial. These noncontrolling interests are subject to U.S. taxation as partnerships. Accordingly, for the three and nine months ended September 30, 20172020 and 2016,2019, the income attributable to these noncontrolling interests iswas reported in the condensed consolidated statementsCondensed Consolidated Statements of comprehensive income (loss),Comprehensive Income, but the related U.S. income tax expense attributable to these noncontrolling interests iswas not reported by the Company as it is the obligation of the individual partners. The Company’s provisions for (benefit(benefits from) income taxes and effective tax rates were $(6.5)$52.8 million, 20.9%, and $(0.6) million, and 14.0%9.9% for the three months ended September 30, 2020 and $4.92019, respectively, and $200.0 million, 17.8%, and $(14.3) million, and 12.8% for the three months ended September 30, 2017 and 2016, respectively, and $(2.9) million and 16.7% and $17.3 million and 12.3%16.0%, for the nine months ended September 30, 20172020 and 2016,2019, respectively. Income tax expense is also affected by the differing effective tax rates in foreign, state and local jurisdictions where certain of the Company’s subsidiaries are subject to corporate taxation.


Included in Other assets on the condensed consolidated statementsCondensed Consolidated Statements of financial conditionFinancial Condition at September 30, 20172020 and December 31, 2016 are2019 were current income tax receivables of $125.8$99.8 million and $5.8$39.3 million, respectively. The balancebalances at September 30, 20172020 and December 31, 2019 primarily comprises thecomprised income tax benefit of KCG net operating losses that were generated priorbenefits due to the AcquisitionCompany from federal, state, local, and that are eligibleforeign tax jurisdictions based on income before taxes. Included in Accounts payable, accrued expenses and other liabilities on the Condensed Consolidated Statements of Financial Condition at September 30, 2020 and December 31, 2019 were current tax liabilities of $33.8 million and $11.5 million, respectively. The balances at September 30, 2020 and December 31, 2019 primarily comprised income taxes owed to be carried back by the Company.

federal, state and local, and foreign tax jurisdictions based on income before taxes.


Deferred income taxes arise primarily due to the amortization of the deferred tax assets recognized in connection with the IPO (see Note 5 and Note 14)6 “Tax Receivable Agreements”), the Acquisition of KCG and the KCGITG Acquisition (Note 3)(see Note 3 “ITG Acquisition”), differences in the valuation of financial assets and liabilities, and in connection with other temporary differences arising from the deductibility of compensation, depreciation, and depreciationother expenses in different time periods for book and income tax return purposes.


There are no expiration dates on the deferred tax assets. The provisions of ASC 740 require that carrying amounts of deferred tax assets be reduced by a valuation allowance if, based on the available evidence, it is more likely than not that some
44
Table of Contents
portion or all of the deferred tax assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically with appropriate consideration given to all positive and negative evidence related to the realization of the deferred tax assets. At September 30, 2020 and December 31, 2019, the Company had U.S. federal net operating loss carryforwards of $0.0 million and $91.3 million, respectively, and has recorded a deferred tax asset related to these federal net operating carryforwards of $0.0 million and $19.2 million, respectively. The Company did not record a valuation allowance against this deferred tax asset. At September 30, 2020, the Company recorded deferred income taxes related to state and local net operating losses of $3.7 million. These net operating losses will begin to expire in 2031. The Company did not record a valuation allowance against this deferred tax asset.

As a result of the ITG Acquisition, the Company had non-U.S. net operating losses at September 30, 2020 and December 31, 2019 of $75.9 million and $86.3 million, respectively, and recorded a related deferred tax asset of $15.5 million and $17.9 million, respectively. A valuation allowance of $15.2 million and $15.6 million was recorded against this deferred tax asset at September 30, 2020 and December 31, 2019, respectively, as it is more likely than not that a portion of this deferred tax asset will not be realized. As a result of the Acquisition of KCG, the Company had non-U.S. net operating losses at September 30, 2020 and December 31, 2019 of $239.0 million and $239.0 million, respectively, and recorded a related deferred tax asset of $31.5$44.9 million relating to non-U.S. net operating losses.and $44.9 million, respectively. A full valuation allowance was also recorded against this deferred tax asset at the Closing date and at September 30, 20172020 and December 31, 2019 as it is more likely than not that this deferred tax asset will not be realized.

No valuation allowance against the remaining deferred taxes was recorded as of September 30, 2017 or2020 and December 31, 20162019 because it is more likely than not that these deferred tax assets will be fully realized.


The Company is subject to taxation in U.S. federal, state, local and foreign jurisdictions. As of September 30, 2017,2020, the Company’s tax years for 2013 through 20162019 and 2010 through 2017 are2019 were subject to examination by U.S. and non-U.S. tax authorities, respectively. As a result of the acquisitionITG Acquisition and the Acquisition of KCG, the Company has assumed any ITG and KCG tax exposures.   KCG is currently subject to U.S. Federal income tax examinations for the tax years 2013 through 2016, and to non-U.S. income tax examinations for the tax years 2007 through 2016. In addition, the Company is subject to state and local income tax examinations in various jurisdictions for the tax years 20072013 through 2016.2019. The final outcome of these examinations is not yet determinable. However, the Company anticipates that adjustments related to the unrecognized tax benefits,these examinations, if any, will not result in a material change to theits financial condition, results of operations and cash flows.

The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income or financial condition. loss before income taxes and noncontrolling interest. Penalties, if any, are recorded in Operations and administrative expense and interest received or paid is recorded in Other, net or Operations and administrative expense in the Condensed Consolidated Statement of Comprehensive Income, respectively.

The Company had $8.0$9.1 million of unrecognized tax benefits as of September 30, 2017 as2020, all of which would affect the Company’s effective tax rate if recognized. The Company has determined that there are no uncertain tax positions that would have a result of acquiring KCG, and  no unrecognized tax benefitsmaterial impact on the Company’s financial position as of December 31, 2016.

13.September 30, 2020.


15. Commitments, Contingencies and Guarantees

Litigation


Legal Proceedings

In the ordinary course of business, the nature of the Company’s business subjects it to claims, lawsuits, regulatory examinations or investigations and other proceedings. The Company isand its subsidiaries are subject to variousseveral of these matters at the present time.  Given the inherent difficulty of predicting the outcome of litigation and regulatory matters, particularly in regulatory examinations or investigations or other proceedings in which substantial or indeterminate judgments, settlements, disgorgements, restitution, penalties, injunctions, damages or fines are sought, or where such matters are in the early stages, the Company cannot estimate losses or ranges of losses for such matters where there is only a reasonable possibility that a loss may be incurred. In addition, there are numerous factors that result in a greater degree of complexity in class-action lawsuits as compared to other types of litigation. There can be no assurance that these legal proceedings will not have a material adverse effect on the Company’s results of operations in any future period, and a material judgment, fine or sanction could have a material adverse impact on the Company’s financial condition, results of operations and cash flows. However, it is the opinion of management, after consultation with legal counsel that, based on information currently available, the ultimate outcome of these matters will not have a material adverse impact on the business, financial condition or operating results of the Company, although they might be material to the operating results for any particular reporting period. The Company carries directors’ and officers’ liability insurance coverage and other insurance coverage for potential claims, including securities actions, against the Company and its respective directors and officers.

45
Table of Contents
On January 29, 2019, the Company was named as a defendant in Ford v. ProShares Trust II, et al., No. 19-cv-886. The complaint was filed in federal district court in New York on behalf of a putative class, and asserts claims against the Company and numerous other financial institutions under Section 11 of the Securities Act of 1933 in connection with a ProShares inverse-volatility ETF. Additionally, on February 27, 2019, and March 1, 2019, the Company was named as a defendant in Bittner v. ProShares Trust II, et al., No. 19-cv-1840, and Mareno v. ProShares Trust II, et al., No. 19-cv-1955, respectively. The complaints were filed in federal district court in New York on behalf of putative classes, and asserted substantially similar claims against the Company and other financial institutions. On April 29, 2019, these 3 actions were consolidated in federal district court in New York as In re ProShares Trust II Securities Litigation, No. 19-cv-886-DLC. A consolidated amended complaint, which did not specify the amount of alleged damages, was filed in the consolidated action on June 21, 2019. Defendants moved to dismiss the consolidated amended complaint on August 2, 2019. In response, plaintiffs filed a consolidated second amended complaint on September 6, 2019, which also did not specify the amount of alleged damages. Defendants moved to dismiss the consolidated second amended complaint on September 27, 2019. The defendants’ motion to dismiss was granted on January 3, 2020, and plaintiffs subsequently filed a Notice of Appeal of the district court's ruling on the motion to dismiss on January 31, 2020 and an opening brief on May 14, 2020. The defendants' response brief was filed August 13, 2020 and the plaintiffs' reply was filed September 17, 2020. The Company believes that arisethe claims are without merit and is defending itself vigorously.

Other Legal and Regulatory Matters

The Company owns subsidiaries including regulated entities that are subject to extensive oversight under federal, state and applicable international laws as well as self-regulatory organization (“SRO”) rules. Changes in market structure and the need to remain competitive require constant changes to the Company's systems, order routing and order handling procedures. The Company makes these changes while continuously endeavoring to comply with many complex laws and rules. Compliance, surveillance and trading issues common in the securities industry are monitored by, reported to, and/or reviewed in the ordinary course of business. The Company has also been, is currently, and maybusiness by the Company's regulators in the future be, the subject of one or more regulatory or self-regulatory organization enforcement actions, including but not limited to targetedU.S. and routine regulatory inquiries and investigations involving Regulation NMS, Regulation SHO, Regulation SCI, best execution, handling of retailabroad. As a major order flow use of market data feeds, capital requirements and other domestic and foreign securities rules and regulations

37

Table of Contents

which mayexecution destination, the Company is named from time to time result in, or is asked to respond to a number of regulatory matters brought by U.S. regulators, foreign regulators, SROs, as well as actions brought by private plaintiffs, which arise from its business activities. There has recently been an increased focus by regulators on Anti-Money Laundering and sanctions compliance by broker-dealers and similar entities, as well as an enhanced interest on suspicious activity reporting and transactions involving microcap and low-priced securities. In addition, there has been an increased focus by Congress, federal and state regulators, SROs and the impositionmedia on market structure issues, and in particular, high frequency trading, best execution, internalization, alternative trading system (“ATS”) manner of penalties or fines. Theoperations, market fragmentation and complexity, colocation, cybersecurity, access to market data feeds and remuneration arrangements, such as payment for order flow and exchange fee structures. From time to time, the Company has also beenis the subject of requests for information and documents from the SEC, the Financial Industry Regulatory Authority and other regulators. It is the Company's practice to cooperate and comply with the requests for information and documents.


The Company is currently the subject of various regulatory reviews and investigations by federal and foreign regulators and SROs, including the SEC and the State of New York Office of the Attorney General (“NYAG”). Certain ofFinancial Industry Regulatory Authority. In some instances, these matters may result or have resulted, in adverse judgments, settlements, fines, penalties, censures, injunctions or other relief, and the Company’s business or reputation could be negatively impacted if it were determined that disciplinary or other enforcement actions were required. The ultimate effect on the Company from the pending proceedings and claims, if any, is presently unknown. Where available information indicates that it is probable a liability had been incurred at the date of the condensed consolidated financial statements and the Company can reasonably estimate the amount of that loss, the Company accrues the estimated loss by a charge to income. Subject to the foregoing, based on information currently available, at present management believes it is not probable that the resolution of any known matters will result in a material adverse effect on the Company’s financial position, although they might be material for the Company’s results of operations disciplinary action and/or cash  flows for any particular reporting period.

Ina civil or administrative action. For example, in December 2015, the enforcement committee of the Autorité des marchéMarchés financiersFinanciers (“AMF”) fined the Company’s European subsidiary in the amount of €5.0 million (approximately $5.4 million) based on its allegations that the subsidiary of MTHa predecessor entity engaged in price manipulation and violations of the AMF General Regulation and Euronext Market Rules. In accordance with the foregoing, the Company accrued an estimated loss of €5.0The fine was subsequently reduced in 2017 to €3.3 million (approximately $5.4$3.9 million) and in relation to the fine imposed by the AMF. The Company’s management believes that the relevant trading engaged in by the subsidiary of MTH2018 was conducted in accordance with applicable French law and regulations and the Company is pursuing its rights of appeal. In May 2017, the fine wasfurther reduced to €3.0 million (approximately $3.5$3.4 million), subject to an incremental charge of €0.3 million and accordingly the. The Company reduced its accrual to €3.3 million (approximately $3.9 million), with the benefit recorded under operations and administrative expense in the statement of comprehensive income (loss), and the Company continues to pursue its rights to appeal. Additionally, in July 2016, a subsidiary of KCG was fined €400,000 by the AMF’s enforcement committee.  KCGhas fully reserved for the monetary penalty as of September 30, 2020.


Representations and Warranties; Indemnification Arrangements

In the normal course of its operations, the Company enters into contracts that contain a variety of representations and warranties in addition to indemnification obligations. The Company's maximum exposure under these arrangements is currently unknown, as any such exposure could relate to claims not yet brought or events which have not yet occurred. For example, in November 2013, KCG sold Urban Financial of America, LLC (“Urban”), the reverse mortgage origination and securitization business previously owned by Knight Capital Group, Inc., to an investor group now known as Finance of America Reverse, LLC (“FAR”). Pursuant to the terms of the Stock Purchase Agreement between KCG and FAR, Virtu has certain continuing obligations related to KCG's prior ownership of Urban and has been and, in the second quarterfuture may be, advised by FAR of 2016.

In addition, in connection with the Acquisition of KCG, on June 2, 2017, a putative stockholder of KCG filed a complaint in the Delaware Chancery Court concerning the Acquisition of KCG, as well a motion for a preliminary injunction and a motion for expedited proceedings. The case is captioned Greenway v. KCG Holdings, Inc., et al., Case No. 2017-0421-JTL (the “Greenway Action”), and is brought on behalf of a putative class of KCG stockholders against KCG, the members of KCG’s board of directors, Virtu, Orchestra Merger Sub, Inc. (“Merger Sub”), and Jefferies LLC (“Jefferies”). Among other things, the complaint alleged that, prior to the time that the KCG board approved the Acquisition of KCG and the voting agreement between Jefferies and Virtu on April 20, 2017, Virtu became an “interested stockholder” under, and subject to the restriction on business combinations set forth in, Section 203 of the Delaware General Corporate Law as a result of an “agreement”, “arrangement” or “understanding” with Jefferies. The complaint also alleges that the KCG board members breached their fiduciary duties in connection with the Acquisition of KCG and that Jefferies, Virtu and Merger Sub aided and abetted those alleged breaches of duty by the KCG board members.  On June 28, 2017, KCG issued an amended proxy statement and scheduled a KCG stockholder vote on the Acquisition of KCG under Section 203 of the DGCL, which was approved and which defendants contend mootspotential claims asserted by the plaintiff in the Greenway Action.  On June 30, 2017, the Delaware Chancery Court entered a stipulation and order providing for the withdrawal of the plaintiff’s motion for preliminary injunction. The Greenway Action remains pending and the plaintiff may attempt to pursue monetary damages related to the claims set forth in the complaint and/or attempt to assert new or different claims through an amended complaint. No amount of damages is stated in the complaint. Virtu intends to defend vigorously against the claims alleged in the Greenway Action.

Indemnification Arrangements

thereunder.


Consistent with standard business practices in the normal course of business, the Company enters into contracts that contain a variety of representations and warranties and general indemnifications. The Company has also provided general
46
Table of Contents
indemnifications to its managers, officers, directors, employees, and agents against expenses, legal fees, judgments, fines, settlements, and other amounts actually and reasonably incurred by such persons under certain circumstances as more fully disclosed in its operating agreement. The overall maximum amount of the obligations (if any) cannot reasonably be estimated as it will depend on the facts and circumstances that give rise to any future claims.

38


16. Leases

The Company adopted ASU 2016-02 on January 1, 2019, and elected the modified retrospective method of implementation. The standard requires the recognition of right-of-use ("ROU") assets and lease liabilities for leases, which are defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company has elected the practical expedient which allows for leases with an initial term of 12 months or less to be excluded from recognition on the Condensed Consolidated Statement of Financial Condition and for which lease expense is recognized on a straight-line basis over the lease term.

Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee. These leases are primarily for corporate office space, datacenters, and technology equipment. The leases have remaining terms of 1 year to 15 years, some of which include options to extend the initial term at the Company's discretion. The lease terms used in calculating ROU assets and lease liabilities include the options to extend the initial term when the Company is reasonably certain of exercising the options. The Company's lease agreements do not contain any material residual value guarantees, restrictions or covenants. In addition to the base rental costs, the Company’s lease agreements for corporate office space generally provide for rent escalations resulting from increased assessments for operating expenses, real estate taxes and other charges. Payments for such reimbursable expenses are considered variable and are recognized as variable lease costs in the period in which the obligation for those payments was incurred.

The Company also subleases certain office space and facilities to third parties. The subleases have remaining terms of 1 to 12 years. The Company recognizes amounts received from subleases on a straight-line basis over the term of the sublease within Operations and administrative expense on the Condensed Consolidated Statement of Comprehensive Income.

As the implied discount rate for most of the Company's leases is not readily determinable, the Company uses its incremental borrowing rate on its secured borrowings in determining the present value of lease payments.

Lease assets and liabilities are summarized as follows:

(in thousands)Financial Statement LocationSeptember 30, 2020December 31, 2019
Operating leases
Operating lease right-of-use assetsOperating lease right-of-use assets$287,069 $314,526 
Operating lease liabilitiesOperating lease liabilities330,626 365,364 
Finance leases
Property and equipment, at costProperty, equipment, and capitalized software, net36,093 37,589 
Accumulated depreciationProperty, equipment, and capitalized software, net(21,888)(24,579)
Finance lease liabilitiesAccounts payable, accrued expenses, and other liabilities14,425 13,371 

Weighted average remaining lease term and discount rate are as follows:

September 30, 2020December 31, 2019
Weighted average remaining lease term
Operating leases7.01 years7.50 years
Finance leases2.08 years1.45 years
Weighted average discount rate
Operating leases5.67 %5.70 %
Finance leases3.17 %3.52 %

47
Table of Contents

14.The components of lease expense were as follows:


Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2020201920202019
Operating lease cost:
Fixed$18,521 18,637 $55,333 $52,722 
Variable2,393 2,352 6,614 6,365 
Impairment of ROU Asset0 1,185 — 27,042 
Total Operating lease cost20,914 22,174 61,947 86,129 
Sublease income4,399 3,024 11,994 8,939 
Finance lease cost:
Amortization of right-of-use assets2,668 3,277 8,838 9,329 
Interest on lease liabilities97 165 339 525 
Total Finance lease cost2,765 3,442 9,177 9,854 

During the nine months ended September 30, 2019, the Company ceased use of certain office lease premises as part of its ongoing effort to consolidate office space. For the three months ended September 30, 2019, the Company recognized $1.3 million in Termination of office leases on the condensed consolidated statement of comprehensive income related to these premises, comprised entirely of impairment of ROU assets. For the nine months ended September 30, 2019, the Company recognized $66.5 million in Termination of office leases on the Condensed Consolidated Statement of Comprehensive Income related to these premises, comprising $27.0 million of impairments of ROU assets, $37.9 million of write-offs of leasehold improvements and fixed assets, and $1.5 million of dilapidation charges. There was 0 impairment of ROU assets during the three and nine months ended September 30, 2020.

Future minimum lease payments under operating and finance leases with non-cancelable lease terms, as of September 30, 2020, are as follows:

(in thousands)Operating LeasesFinance Leases
2020$19,414 $3,040 
202174,907 6,774 
202268,629 4,035 
202365,048 1,438 
202434,779 0 
2025 and thereafter141,713 0 
Total lease payments$404,490 $15,287 
Less imputed interest(73,864)(862)
Total lease liability$330,626 $14,425 

48
Table of Contents
Future minimum lease payments under operating and finance leases with non-cancelable lease terms, as of December 31, 2019, are as follows:

(in thousands)Operating LeasesFinance Leases
202076,118 10,929 
202173,062 3,305 
202266,850 565 
202363,676 0 
202432,144 0 
2025 and thereafter141,371 0 
Total lease payments$453,221 $14,799 
Less imputed interest(87,857)(1,428)
Total lease liability$365,364 $13,371 

17. Cash

The following table provides a reconciliation of cash and cash equivalents together with restricted or segregated cash
as reported within the Condensed Consolidated Statements of Financial Condition to the sum of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows.

(in thousands)September 30, 2020December 31, 2019
Cash and cash equivalents$567,677 $732,164 
Cash restricted or segregated under regulations and other98,285 41,116 
Total cash, cash equivalents and restricted cash shown in the statement of cash flows$665,962 $773,280 

18. Capital Structure


The Company has four4 classes of authorized common stock. The Class A common stockCommon Stock and the Class C common stockCommon Stock have one1 vote per share. The Class B common stockCommon Stock and the Class D common stockCommon Stock have 10 votes per share. Shares of the Company’s common stock generally vote together as a single class on all matters submitted to a vote of the Company’s stockholders.

Initial Public Offering and Reorganization Transactions

Prior


During the period prior to the Reorganization Transactions and IPO, the Company’s business was conducted throughClass A-2 profits interests and Class B interests in Virtu Financial were issued to Employee Holdco (as defined below) on behalf of certain key employees and its subsidiaries. In a series of transactions that occurred in connection with the IPO, (i) the Company became the sole managing member of Virtu Financial and acquired Virtu Financial Units, (ii) certain direct or indirect equityholders of Virtu Financial acquired shares of the Company’s Class A common stock and (iii) certain direct or indirect equityholders of Virtu Financial had their interests reclassified into Virtu Financial Units and acquired shares of the Company’s Class C common stock or, in the case of the TJMT Holdings LLC only, shares of the Company’s Class D common stock (collectively, the “Virtu Members”).

On April 21, 2015, the Company  completed its IPO of 19,012,112 shares of its Class A common stock, par value $0.00001 per share, including 2,479,840 shares of Class A common stock sold in connection with the full exercise of the option to purchase additional shares granted to the underwriters, at a price to the public of $19.00 per share. The shares began trading on NASDAQ on April 16, 2015 under the ticker symbol “VIRT” and the offering was closed on April 21, 2015.stakeholders. In connection with the Reorganization Transactions, the Company sold 16,532,272 sharesall Class A-2 profits interests and Class B interests were reclassified into Virtu Financial Units. As of Class A common stock. The Company used its net proceeds from its IPO to purchase sharesSeptember 30, 2020 and December 31, 2019, there were 5,499,713 and 7,919,952 Virtu Financial Units outstanding held by Employee Holdco (as defined below), respectively, and 2,420,239 and 823,456 of Class A common stock from an affiliate of Silver Lake Partners, purchasesuch Virtu Financial Units and corresponding shares of Class C common stock from certain Virtu Members,Common Stock were exchanged into Class A Common Stock, forfeited or repurchased during the nine months ended September 30, 2020 and for working capital and general corporate purposes.

2019, respectively.


Amended and Restated 2015 Management Incentive Plan


The Company’s board of directors and stockholders adopted the 2015 Management Incentive Plan, which became effective upon consummation of the IPO, and was subsequently amended and restated following receipt of approval from the Company’s stockholders on June 30, 2017. The Amended and Restated 2015 Management Incentive Plan provides for the grant of stock options, restricted stock units, and other awards based on an aggregate of 16,000,000 shares of Class A common stock,Common Stock, subject to additional sublimits, including limits on the total option grant to any one participant in a single year and the total performance award to any one participant in a single year.

Secondary Offerings

In November On April 23, 2020, the Company’s board of directors adopted an amendment to the Company’s Amended and Restated 2015 Management Incentive Plan in order to increase the Company and certain selling stockholders affiliated with Silver Lake Partners completed a public offering (the “November 2015 Secondary Offering”)number of 6,473,371 shares of the Company’s Class A common stock.  The selling stockholders sold 6,075,837Common Stock reserved for issuance, and in respect of which awards may be granted under the Amended and Restated 2015 Plan from 16,000,000 shares of Class A common stock and the Company sold 397,534Common Stock to an aggregate of 21,000,000 shares of Class A common stockCommon Stock, and the amendment was approved by the Company’s shareholders at a price to the publicCompany's annual meeting of $22.15 per share.  The selling stockholders received allon June 5, 2020.


49
Table of Contents
Amended and Restated Investment Technology Group, Inc. 2007 Omnibus Equity Compensation Plan

On the ITG Closing Date, the Company assumed the Amended and Restated ITG 2007 Equity Plan and the Assumed Awards. As of the net proceeds fromITG Closing Date, the saleaggregate number of shares of Class A common stock by them inCommon Stock subject to such Assumed Awards was 2,497,028 and the November 2015 Secondary Offering.  The Company used its net proceeds from the offering to purchase Virtu Financial Units (together with correspondingaggregate number of shares of Class C common stock) from one of its non-executive employees at a net price equalA Common Stock that remained issuable pursuant to the price paid byAmended and Restated ITG 2007 Equity Plan was 1,230,406.

Acquisition of KCG

On the underwriters forKCG Closing Date, the Company completed the all-cash Acquisition of KCG. In connection with the Acquisition of KCG, the Company issued 8,012,821 shares of itsthe Company’s Class A common stock.  FollowingCommon Stock to Aranda Investments Pte. Ltd. (“Aranda”), an affiliate of Temasek Holdings (Private) Limited (“Temasek”), for an aggregate purchase price of approximately $125.0 million and 40,064,103 shares of the November 2015 Company’s Class A Common Stock to North Island Holdings I, LP (the “North Island Stockholder”) for an aggregate purchase price of approximately $618.7 million, in each case in accordance with terms of an investment agreement in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) of the Securities Act. The investment agreements were filed as exhibits to the Company’s 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2020.

Secondary Offering, Silver Lake Partners no longer holds any equity interest in the Company.

Offerings


In September 2016,May 2019, the Company completed a public offering (the “September 2016“May 2019 Secondary Offering,” collectively with the November 2015 Secondary Offering, the “Secondary Offerings”Offering”) of 1,103,668 shares of the Company’s Class A common stock.  The Company sold 1,103,6689,000,000 shares of Class A common stockCommon Stock at a purchase price toper share paid by the publicunderwriters of $15.75 per share. The Company$22.00, the proceeds of which were used the net proceeds from the September 2016 Secondary Offering to purchase an equivalent number of Virtu Financial Units (together withand corresponding shares of Class C common stock)D Common Stock from TJMT Holdings LLC pursuant to that certain employees at a net price equal to the price paidMember Purchase Agreement, entered into on May 14, 2019 by the underwriters for shares of its Class A common stock, which was the price at which the shares were offered to the public less underwriting discounts and commissions of $0.10 per share.

39

Table of Contents

Acquisition of KCG

On the Closing Date and in connection with the financing of the Acquisition,between the Company issued 6,346,155 shares ofand TJMT Holdings LLC.


Employee Exchanges

During the Company’s Class A common stock to Aranda for an aggregate purchase price of approximately $99.0 millionnine months ended September 30, 2020 and 39,725,979 shares of the Company Class A Common Stock to NIH for an aggregate purchase price of approximately $613.5 million.  On August 10 2017, the Company issued an additional 1,666,666 shares of its Class A Common Stock for an aggregate purchase price of $26.0 million and an additional 338,124 shares of its Class A Common Stock for an aggregate purchase price of $5.2 million.  See Note 3 for additional details.

Employee Exchange

In February, May and August 2017,2019, pursuant to the exchange agreement by and among the Company, Virtu Financial and holders of Virtu Financial common units,Units, certain current and former employees elected to exchange 683,762, 307,544,2,420,239 and 155,009823,456 units, respectively in Virtu Financial held directly or on their behalf by Virtu Financial Employee Holdco LLC (“Employee Holdco”) on a one-for-one1-for-one basis for shares of Class A common stock.

As a result of the completion of the IPO, the Reorganization Transactions, the Secondary Offerings, employee exchange, and the share issuance in connection with the Acquisition, theCommon Stock.


The Company holds approximately 48.0%a 64.2% interest in Virtu Financial at September 30, 2017.

15. Share-based Compensation

Share-based compensation prior2020.


Warrant Issuance

On March 20, 2020, in connection with and in consideration of the Founder Member’s commitments under the Founder Member Loan Facility (as described in Note 10 “Borrowings”), the Company delivered to the Founder Member a warrant (the “Warrant”) to purchase shares of the Company’s Reorganization completedClass A Common Stock. Pursuant to the Warrant, the Founder Member may purchase up to 3,000,000 shares of Class A Common Stock. If at any time during the term of the Founder Member Facility, the Founder Member Loans equal to or greater than $100 million had remained outstanding for a certain period of time specified in the Warrant, the number of shares would have increased to 10,000,000. The Founder Member Loan Facility Term expired on AprilSeptember 20, 2020 without the Company having borrowed any Founder Member Loans thereunder (as described in Note 10 "Borrowings"), and as a result no such increase in the number of shares which may be purchased has occurred or will occur pursuant to the terms of the Warrant. The exercise price per share of the Class A Common Stock issuable pursuant to the Warrant is $22.98, which in accordance with the terms of the Warrant, is equal to the average of the volume weighted average prices of the Class A Common Stock for the ten (10) trading days following May 7, 2020, the date on which the Company publicly announced its earnings results for the first quarter of 2020. The Warrant may be exercised to purchase up to 3,000,000 shares of the Company's Class A Common Stock on any date after May 22, 2020 up to and including January 15, 20152022. The Warrant and IPO commencedClass A Common Stock issuable pursuant to the Warrant were offered, and will be issued and sold, in reliance on April 16, 2015

Class A-2 profits interests were issuedthe exemption from the registration requirements of the Securities Act, set forth under Section 4(a)(2) of the Securities Act relating to Employee Holdco,sales by an issuer not involving any public offering. The foregoing description of the Warrant does not purport to be complete and is qualified in its entirety by reference to the complete text of the Warrant, which was filed as an exhibit to the Company's 2020 quarterly report on Form 10-Q for the period ended March 31, 2020 filed with the Securities and Exchange Commission on May 11, 2020.


50
Table of Contents
The fair value of the Warrant was determined using a holding company that holdsBlack-Scholes-Merton model, and was recorded as a debt issuance cost within Other Assets on the interestsCondensed Consolidated Statement of Financial Condition and as an increase to Additional paid-in capital on behalfthe Condensed Consolidated Statement of certain key employees or stakeholders. DuringChanges in Equity. The balance was amortized on a straight-line basis from March 20, 2020 through September 20, 2020, the date on which the Founder Member Loan Facility expired, and recorded as expense within Debt issue cost related to debt refinancing, prepayment and commitment fees in the Condensed Consolidated Statement of Comprehensive Income.

Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in Other Comprehensive Income (Loss) for the three and nine months ended September 30, 20172020 and 2016, the Company recorded expense relating to non-voting common interest units, which were originally granted as Class A-2 profits interests and were reclassified into non-voting common interest units in connection with the Reorganization Transactions.  The non-voting common interest units are subject2019:

Three Months Ended September 30, 2020
(in thousands)AOCI Beginning BalanceAmounts
reclassified from
AOCI to income		Amounts recorded
in AOCI		AOCI Ending Balance
Net change in unrealized cash flow hedges gains (losses) (1)$(36,710)$1,948 $(1,797)$(36,559)
Foreign exchange translation adjustment(2,857)0 4,213 1,356 
Total$(39,567)$1,948 $2,416 $(35,203)
(1) Amounts reclassified from AOCI to income are included within Financing interest expense on long-term borrowings on the Condensed Consolidated Statements of Comprehensive Income. As of September 30, 2020, the Company expects approximately $13.2 million to be reclassified from AOCI into earnings over the next 12 months. The timing of the reclassification is based on the interest payment schedule of the long-term borrowings.
Nine Months Ended September 30, 2020
(in thousands)AOCI Beginning BalanceAmounts
reclassified from
AOCI to income		Amounts recorded
in AOCI		AOCI Ending Balance
Net change in unrealized cash flow hedges gains (losses)$0 $5,846 $(42,405)$(36,559)
Foreign exchange translation adjustment(647)0 2,003 1,356 
Total$(647)$5,846 $(40,402)$(35,203)
(1) Amounts reclassified from AOCI to income are included within Financing interest expense on long-term borrowings on the Condensed Consolidated Statements of Comprehensive Income. As of September 30, 2020, the Company expects approximately $13.2 million to be reclassified from AOCI into earnings over the next 12 months. The timing of the reclassification is based on the interest payment schedule of the long-term borrowings.
Three Months Ended September 30, 2019
(in thousands)AOCI Beginning BalanceAmounts
reclassified from
AOCI to income		Amounts recorded
in AOCI		AOCI Ending Balance
Foreign exchange translation adjustment$(1,670)$0 $(4,316)$(5,986)
Total$(1,670)$0 $(4,316)$(5,986)
Nine Months Ended September 30, 2019
(in thousands)AOCI Beginning BalanceAmounts
reclassified from
AOCI to income		Amounts recorded
in AOCI		AOCI Ending Balance
Foreign exchange translation adjustment$(82)$0 $(5,904)$(5,986)
Total$(82)$0 $(5,904)$(5,986)

19. Share-based Compensation

Pursuant to the same vesting requirements as the prior Class A-2 profits interests, which were either fully vested upon issuance or vested over a period of up to four years,Amended and in each case are subject to repurchase provisions upon certain termination events. These awards were accounted for as equity awards and were measured at fair value at the date of grant. The Company recognized compensation expense related to the vesting of non-voting common interest units (formerly Class A-2 profits interests) of $0.1 million and $0.4 million for the three months ended September 30, 2017 and 2016, respectively, and recognized $0.5 million and $1.1 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, total unrecognized share-based compensation expense related to unvested non-voting common interest units (formerly Class A-2 profits interests), was $0.1 million, and this amount is expected to be recognized over a weighted average period of 0.1 years.

On July 8, 2011, 2,625,000 Class A-2 capital interests were contributed by Class A-2 members to Virtu East MIP LLC (“East MIP”). East MIP issued Class A interests to the members who contributed the Class A-2 capital

interests, and Class B interests (“East MIP Class B interests”) to certain key employees.  Additionally, Class B interests were issued to Employee Holdco on behalf of certain key employees and stakeholders on July 8, 2011, and on subsequent dates.  East MIP Class B interests and Class B interests were each subject to time based vesting over four years and only fully vested upon the consummation of a qualifying capital transaction by the Company, including an IPO.  In connection with the Reorganization Transactions, East MIP was liquidated and a portion of the Class A-2 capital interests held by East MIP were contributed to Employee Holdco on behalf of holders of East MIP Class B Interests (or, in the case of certain employees located outside the United States, contributed to a trust whose trustee is one of the Company’s subsidiaries), which Class A-2 capital interests were subsequently reclassified into non-voting common interest units. The Company recognized compensation expense in respect of non-voting common interest units (formerly Class B interests) vested of $0.2 million and $0.2 million for the three months ended September 30, 2017 and 2016, respectively, and recognized $0.5 million and $0.7 million for the nine months ended September 30, 2017 and 2016. The compensation expense related to non-voting common interest units (formerly Class B interests) was included within charges related to share based compensation at IPO in the condensed consolidated statements of comprehensive income (loss). As of September 30, 2017 and December 31, 2016, total unrecognized share-based compensation expense related

40

Table of Contents

to unvested non-voting common interest units (formerly Class B interests) was $0.2 million and $0.8 million, respectively, and this amount is expected to be recognized over a weighted average period of 0.3 years and 1.0 years, respectively.

Additionally, in connection with the compensation charges related to non-voting common interest units (formerly Class B interests) mentioned above, the Company capitalized $0.01 million and $0.03 million for the three months ended September 30, 2017 and 2016, respectively, and $0.02 million and $0.06 million for the nine months ended September 30, 2017 and 2016, respectively. The amortization costs related to these capitalized compensation charges and previously capitalized compensation charges related to East MIP Class B interests and Class B interests were approximately $0.02 million and $0.1 million for the three months ended September 30, 2017 and 2016, respectively, and were approximately $0.06 million and $0.7 million for the nine months ended September 30, 2017 and 2016, respectively. The costs attributable to employees incurred in development of software for internal use were included within charges related to share based compensation at IPO in the condensed consolidated statements of comprehensive income (loss).

The fair value of the Class A-2 profit, Class B and East MIP Class B interest was estimated by the Company using an option pricing methodology based on expected volatility, risk-free rates and expected life. Expected volatility is calculated based on companies in the same peer group as the Company.

In connection with the Reorganization Transactions, all Class A-2 profits interests, Class B and East MIP Class B interests were reclassified into non-voting common interest units. As of September 30, 2017 and December 31, 2016, there were 12,765,051 and 14,231,535non-voting common interest units outstanding, respectively. There were 429,668 and 1,100,668 non-voting common interest units and corresponding Class C common stock exchanged into Class A common stock, forfeited or repurchased during the three months ended September 30, 2017 and 2016, respectively; and 1,466,484 and 1,162,891 non-voting common interest units and corresponding Class C common stock were exchanged into Class A common stock, forfeited or repurchased during the nine months ended September 30, 2017 and 2016, respectively.

Share-based compensation after the Company’s Reorganization completed on April 15, 2015 and IPO completed  on April 16, 2015

Pursuant toRestated 2015 Management Incentive Plan as described above (Note 14)in Note 18 “Capital Structure”, and in connection with the IPO, non-qualified stock options to purchase shares of Class A common stockCommon Stock were granted, each of which vests in equal annual installments over a period of the four years from grant date and expires not later than 10 years from the date of grant.


51
Table of Contents
The following table summarizes activity related to stock options for the nine months ended September 30, 20172020 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

Weighted Average

 

Weighted Average

 

 

 

Weighted Average

 

 

 

Number of

 

Exercise Price

 

Remaining

 

Number of

 

Exercise Price

 

 

 

Options

    

Per Share

    

Contractual Life

    

Options

    

Per Share

 

At December 31, 2015

 

8,994,000

 

$

19.00

 

 

9.29

 

 —

 

$

 —

 

Granted

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

Exercised

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

Forfeited or expired

 

(645,000)

 

 

 —

 

 

 —

 

 —

 

 

 —

 

At September 30, 2016

 

8,349,000

 

$

19.00

 

 

8.55

 

2,087,250

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2016

 

8,234,000

 

$

19.00

 

 

8.29

 

2,058,500

 

$

19.00

 

Granted

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

Exercised

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

Forfeited or expired

 

(401,000)

 

 

 —

 

 

 —

 

 —

 

 

 —

 

At September 30, 2017

 

7,833,000

 

$

19.00

 

 

7.55

 

3,916,500

 

$

19.00

 

2019:

41


 Options OutstandingOptions Exercisable
 Number of OptionsWeighted Average Exercise Price Per ShareWeighted Average Remaining Contractual LifeNumber of OptionsWeighted Average Exercise Price
Per Share
At December 31, 20183,486,150 $19.00 6.301,660,400 $19.00 
Granted156,129 13.60 4.87156,129 13.60 
Exercised(353,500)19.00 — (353,500)19.00 
Forfeited or expired(40,000)0 — 0 0 
At September 30, 20193,248,779 $18.74 5.493,248,779 $18.74 
At December 31, 20193,233,779 $18.74 5.243,233,779 $18.74 
Granted0 0 — 0 0 
Exercised(807,627)17.96 — (807,627)17.96 
Forfeited or expired0 0 — 0 0 
At September 30, 20202,426,152 $19.00 4.492,426,152 $19.00 

Table of Contents


The expected life has been determined based on an average of vesting and contractual period. The risk-free interest rate was determined based on the yields available on U.S. Treasury zero-coupon issues. The expected stock price volatility was determined based on historical volatilities of comparable companies. The expected dividend yield was determined based on estimated future dividend payments divided by the IPO stock price.


The Company recognized $1.4 million and $1.5 millionfor the nine months ended September 30, 2019 of compensation expense in relation to the stock options issued and outstanding. The stock options to purchase shares of Class A Common Stock were fully vested in 2019, and as such there was no compensation expense recognized in relation to stock options for the three months ended September 30, 2017 and 2016, respectively, and $4.2 million and $4.2 million for the nine months ended September 30, 20172020.

Amended and 2016, respectively.Restated Investment Technology Group, Inc. 2007 Omnibus Equity Compensation Plan

On the ITG Closing Date, the Company assumed the Amended and Restated ITG 2007 Equity Plan and the Assumed Awards. The Assumed Awards are subject to the same terms and conditions that were applicable to them under the Amended and Restated ITG 2007 Equity Plan, except that (i) the Assumed Awards relate to shares of the Company’s Class A Common Stock, (ii) the number of shares of Class A Common Stock subject to the Assumed Awards was the result of an adjustment based upon an Exchange Ratio (as defined in the ITG Merger Agreement) and (iii) the performance share unit awards were converted into service-based vesting restricted stock unit awards that were no longer subject to any performance based vesting conditions. As of September 30, 2017 and December 31, 2016, total unrecognized share-based compensation expense related to unvested stock options was $9.1 million and $14.2 million, and these amounts are to be recognized over a weighted average periodthe ITG Closing Date, the aggregate number of 1.6 years and 2.3 years, respectively.

shares of Class A common stockCommon Stock subject to such Assumed Awards was 2,497,028 and the aggregate number of shares of Class A Common Stock that remained issuable pursuant to the Amended and Restated ITG 2007 Equity Plan was 1,230,406. The Company filed a Registration Statement on Form S-8 on the ITG Closing Date to register such shares of Class A Common Stock.


Class A Common Stock, Restricted Stock Units and Restricted Stock Units

Awards


Pursuant to the Amended and Restated 2015 Management Incentive Plan as described above (Note 13)in Note 18 “Capital Structure”, subsequent to the IPO, shares of immediately vested Class A commonCommon Stock, restricted stock units ("RSUs") and RSUsrestricted stock awards ("RSAs") were granted, the latter which vestwith RSUs and RSAs vesting over a period of up to 4 years. The fair value of the Class A common stockCommon Stock and RSUs was determined based on a volume weighted average price and the expense is being recognized on a straight-line basis over the vesting period. The fair value of the RSAs was determined based on the closing price as of the date of grant and the expense is recognized from the date that achievement of the performance target becomes probable through the remainder of the vesting period. Performance targets are based on the Company's adjusted EBITDA for certain future periods. For the nine months ended September 30, 2020 and 2019, respectively, there were 967,526 and 423,393 shares of immediately vested Class A Common Stock granted as part of year-end compensation. In addition, the Company reduced accrued compensation expense of $0 and $2.9by $11.4 million for the three months ended September 30, 20172020, increased accrued compensation $5.9 million for the three months ended September 30, 2019 and 2016, respectively, andincreased accrued $9.4compensation expense by $14.4 million and $8.7$8.4 million for the nine months ended September 30, 20172020 and 2016,2019, respectively, related to immediately vested Class A common stockCommon Stock expected to be grantedawarded as part of year-end compensation.

incentive compensation, which was included in Employee compensation and payroll taxes on the Condensed Consolidated Statements of Comprehensive Income and Accounts payable, accrued expenses and other liabilities on the Condensed Consolidated Statements of Financial Condition. 

52
Table of Contents

The following table summarizes activity related to the RSUs (including the Assumed Awards) and RSAs:
Number of RSUs and RSAsWeighted
Average Fair Value 
At December 31, 20181,378,922 $20.03 
Granted3,605,114 25.07 
Forfeited(326,458)21.58 
Vested(1,047,866)24.08 
At September 30, 20193,609,712 $23.75 
At December 31, 20192,993,489 $24.10 
Granted (1)3,300,894 17.15 
Forfeited(391,223)17.90 
Vested(2,124,843)20.40 
At September 30, 20203,778,317 $20.77 
(1) Excluded in the number of RSUs and RSAs is 400,000 participating RSAs where the grant date has not been achieved because the performance conditions have not been met.

The Company recognized $9.0 million and $13.0 million for the three months ended September 30, 2020 and 2019 and $25.8 million and $52.6 million for the nine months ended September 30, 20172020 and 2016:

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Number of

 

Average Fair

 

 

Shares

    

Value 

At December 31, 2015

 

984,466

 

$

22.32

Granted

 

35,095

 

 

17.81

Forfeited

 

(115,869)

 

 

22.51

Vested

 

(49,088)

 

 

20.11

At September 30, 2016

 

854,604

 

$

22.22

 

 

 

 

 

 

At December 31, 2016

 

1,573,441

 

$

18.28

Granted

 

34,825

 

 

17.95

Forfeited

 

(212,729)

 

 

18.46

Vested

 

(58,536)

 

 

19.22

At September 30, 2017

 

1,337,001

 

$

18.21

The Company recognized $2.2 million and $1.6 million2019, respectively, of compensation expense in relation to the RSUs for the three months ended September 30, 2017 and 2016, respectively, and $7.1 million and $8.7 million of compensation expense in relation to the RSUs for nine months ended September 30, 2017 and 2016, respectively.RSUs. As of September 30, 20172020 and December 31, 2016,2019, total unrecognized share-based compensation expense related to unvested RSUs was $17.2$50.6 million and $28.5$43.4 million, respectively, and this amount is to be recognized over a weighted average period of 1.81.18 and 2.0 years, and 2.6 years, respectively.

16. Awards in which the specific performance conditions have not been met are not included in unrecognized share-based compensation expense.


20. Regulatory Requirement

As of September 30, 2017, three


U.S. Subsidiaries

The Company's U.S. broker-dealer subsidiaries of the Company aresubsidiary, VAL, is subject to the SEC Uniform Net Capital Rule 15c3-1, which requires the maintenance of minimum net capital of $1.0 million for each ofas detailed in the three broker-dealer subsidiaries. At September 30, 2017, the subsidiaries had net capital of approximately $368,1 million, $48.3 million and $11.6 million, which was approximately $367.1 million, $47.3 million and $10.6 million in excess of the required net capital of $1.0 million required for each of the three subsidiaries. At December 31, 2016, prior to the KCG Acquisition, the Company’s subsidiaries had net capital of approximately $74.5 million and $10.8 million, which was approximately $73.5 million and $9.8 million in excess of the required net capital of $1.0 million and $1.0 million, respectively.

42

Table of Contents

table below. Pursuant to NYSE and NYSE MKT (formerly NYSE Amex) rules, one of the broker-dealer subsidiariesVAL was also required to maintain $1.9$1.0 million of capital in connection with the operation of its DMMdesignated market maker (“DMM”) business as of December 31, 2016.September 30, 2020. The required amount is determined under the exchange rules as the greater of (i) $1 million or 15%(ii) $75,000 for every 0.1% of NYSE transaction dollar volume in each of the market value of 60 trading unitssecurities for each symbol in which the broker-dealer subsidiaryCompany is registered as the DMM.


The Company sold its DMM assetsregulatory capital and regulatory capital requirements of the Company's U.S broker-dealer subsidiary as of September 30, 2020 was as follows:
(in thousands)Regulatory CapitalRegulatory Capital RequirementExcess Regulatory Capital
Virtu Americas LLC$641,314 $2,546 $638,768 

As of September 30, 2020, VALhad $64.9 million of cash in special reserve bank accounts for the benefit of customers pursuant to SEC Rule 15c3-3, Computation for Determination of Reserve Requirements, and $32.6 million of cash in reserve bank accounts for the benefit of proprietary accounts of brokers. Balances in special reserve bank accounts previously maintained by VITG were moved to VAL upon consolidation of the broker dealers. The balances are included within Cash restricted or segregated under regulations and other on the Condensed Consolidated Statement of Financial Condition.

The regulatory capital and regulatory capital requirements of the U.S. broker-dealer subsidiaries as of December 31, 2019 were as follows:
(in thousands)Regulatory CapitalRegulatory Capital RequirementExcess Regulatory Capital
Virtu Americas LLC$257,452 $2,571 $254,881 
Virtu Financial BD LLC30,317 1,000 29,317 
Virtu Financial Capital Markets LLC3,710 1,000 2,710 
Virtu ITG LLC66,069 1,000 65,069 
Virtu Alternet Securities LLC1,931 100 1,831 
53
Table of Contents

As of December 31, 2019, VAL and VITGhad $22.3 million and $7.4 million, respectively, of cash in special reserve bank accounts for the benefit of customers pursuant to SEC Rule 15c3-3, Computation for Determination of Reserve Requirements, and $4.5 million and $5.0 million, respectively, of cash in reserve bank accounts for the benefit of proprietary accounts of brokers.

Foreign Subsidiaries

The Company’s foreign subsidiaries are subject to regulatory capital requirements set by local regulatory bodies, including the Investment Industry Regulatory Organization of Canada (“IIROC”), the Central Bank of Ireland, the Financial Conduct Authority in the United Kingdom, the Australian Securities Exchange, the Securities and Futures Commission in Hong Kong, and the Monetary Authority of Singapore. Virtu Financial Canada ULC was admitted to membership in IIROC in March 2019.

The regulatory net capital balances and regulatory capital requirements applicable to the Company's foreign subsidiaries as of September 2017.

17.30, 2020 were as follows:

(in thousands)Regulatory CapitalRegulatory Capital RequirementExcess Regulatory Capital
Canada
Virtu ITG Canada Corp$12,252 $188 $12,064 
Virtu Financial Canada ULC2,139 188 1,951 
Ireland
Virtu ITG Europe Limited (1)53,402 29,413 23,989 
Virtu Financial Ireland Limited (1)85,251 40,474 44,777 
United Kingdom
Virtu ITG UK Limited (1)1,251 861 390 
Asia Pacific
Virtu ITG Australia Limited27,945 10,307 17,638 
Virtu ITG Hong Kong Limited1,615 522 1,093 
Virtu ITG Singapore Pte Limited734 73 661 
(1) Preliminary
As of September 30, 2020, Virtu ITG Europe Limited and Virtu ITG Canada Corp had $0.2 million and $0.4 million, respectively, of segregated funds on deposit for trade clearing and settlement activity, and Virtu ITG Hong Kong Ltd had $30 thousand of segregated balances under a collateral account control agreement for the benefit of certain customers.

The regulatory net capital balances and regulatory capital requirements applicable to the Company's foreign subsidiaries as of December 31, 2019 were as follows:
(in thousands)Regulatory CapitalRegulatory Capital RequirementExcess Regulatory Capital
Canada
Virtu ITG Canada Corp$13,029 $193 $12,836 
TriAct Canada Marketplace LP2,538 193 2,345 
Virtu Financial Canada ULC2,459 193 2,266 
Ireland
Virtu ITG Europe Limited54,129 32,484 21,645 
Virtu Financial Ireland Limited78,385 43,233 35,152 
United Kingdom
Virtu ITG UK Limited1,378 991 387 
Asia Pacific
Virtu ITG Australia Limited24,574 8,451 16,123 
Virtu ITG Hong Kong Limited3,805 539 3,266 
Virtu ITG Singapore Pte Limited1,179 72 1,107 

As of December 31, 2019, Virtu ITG Europe Limited and Virtu ITG Canada Corp had $1.2 million and $0.4 million, respectively, of funds on deposit for trade clearing and settlement activity, and Virtu ITG Hong Kong Ltd had $30 thousand of segregated balances under a collateral account control agreement for the benefit of certain customers.
54
Table of Contents

21. Geographic Information and Business Segments


The Company operates its business in the U.S. and internationally, primarily in Europe and Asia. Significant transactions and balances between geographic regions occur primarily as a result of certain of the Company’s subsidiaries incurring operating expenses such as employee compensation, communications and data processing and other overhead costs, for the purpose of providing execution, clearing and other support services to affiliates. Charges for transactions between regions are designed to approximate full costs. Intra-region income and expenses and related balances have been eliminated in the geographic information presented below to accurately reflect the external business conducted in each geographical region. The revenues are attributed to countries based on the locations of the subsidiaries. The following table presents total revenues by geographic area for the three and nine months ended September 30, 20172020 and 20162019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(in thousands)

    

2017

    

2016

    

2017

    

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

218,042

 

$

109,324

 

$

399,361

 

$

341,458

 

Ireland

 

 

17,874

 

 

31,936

 

 

79,129

 

 

112,481

 

United Kingdom

 

 

10,485

 

 

 —

 

 

10,485

 

 

 —

 

Sweden

 

 

2,118

 

 

 —

 

 

2,118

 

 

 —

 

Singapore

 

 

22,601

 

 

23,505

 

 

72,210

 

 

77,363

 

India

 

 

178

 

 

 —

 

 

178

 

 

 —

 

Australia

 

 

(2)

 

 

 1

 

 

 1

 

 

 7

 

China

 

 

(10)

 

 

40

 

 

(21)

 

 

316

 

Total revenues

 

$

271,286

 

$

164,806

 

$

563,461

 

$

531,625

 


Prior to the Acquisition, the Company was managed and operated as one business, and, accordingly, operated under one reportable segment.  As a result of the acquisition of KCG, beginning in the third quarter of 2017 the

Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2020201920202019
Revenues:
United States$484,594 $277,855 $2,045,330 $837,350 
Ireland61,320 54,399 233,783 138,964 
Singapore26,630 26,260 140,492 82,805 
Canada71,268 14,739 103,331 35,039 
Australia10,107 9,504 32,186 23,397 
United Kingdom964 (1,334)3,944 (1,867)
Others1,229 917 3,569 2,185 
Total revenues$656,112 $382,340 $2,562,635 $1,117,873 

The Company has three2 operating segments: (i) Market Making;Making and (ii) Execution Services; and (iii)1 non-operating segment: Corporate.


The Market Making segment principally consists of market making in the cash, futures and options markets across global equities, options, fixed income, currencies and commodities. As a market maker, the Company commits capital on a principal basis by offering to buy securities from, or sell securities to, broker dealers,broker-dealers, banks and institutions. The Company engages in principal trading in the Market Making segment direct to clients as well as in a supplemental capacity on exchanges, electronic communications networks (“ECNs”)ECNs and alternative trading systems (“ATSs”).ATSs. The Company is an active participant on all major global equity and futures exchanges and also trades on substantially all domestic electronic options exchanges. As a complement to electronic market making, the cash trading business handles specialized orders and also transacts on the OTC Bulletin Board marketplacesLink ATS operated by the OTC Markets Group Inc. and the Alternative Investment Market of the London Stock Exchange ("AIM"). 


The Execution Services segment comprises agency-basedclient-based trading and trading venues, offering execution services in global equities, options, futures and fixed income on behalf of institutions, banks and broker dealers as well as technology services revenues.broker-dealers. The Company earns commissions and commission equivalents as an agent on behalf of clients as well as between principals to transactions; in addition, the Company will commit capital on behalf of clients as needed. Agency-based,Client-based, execution-only trading in the segment is done primarily through a variety of access points including: (i) algorithmic trading and order routing in global equities and options; (ii) institutional sales traders executingwho offer portfolio trading and single stock sales trading which provides execution expertise for program, block and riskless principal trades in global equities and exchange traded funds ("ETFs");ETFs; and (iii) a fixed income ECN thatmatching of client conditional orders in POSIT Alert and client orders in the Company's ATSs, including Virtu MatchIt, and POSIT. The Execution Services segment also offers trading applications; and (iv) an ATS for U.S. equities.Technology licensing fees are earnedincludes revenues derived from third parties for licensing of the Company’sproviding (a) proprietary risk management and trading infrastructure technology to select third parties for a service fee, (b) workflow technology, the Company’s integrated, broker-neutral trading tools delivered across the globe including trade order and the provision of associatedexecution management and hosting services.

order management software applications and network connectivity and (c) trading analytics, including (1) tools enabling portfolio managers and traders to improve pre-trade, real-time and post-trade execution performance, (2) portfolio construction and optimization decisions and (3) securities valuation.

43


Table of Contents

The Corporate segment contains the Company's investments, principally in strategic trading-related opportunities and maintains corporate overhead expenses and all other income and expenses that are not attributable to the Company's other segments.


Management evaluates the performance of its segments on a pre-tax basis. Segment assets and liabilities are not used for evaluating segment performance or in deciding how to allocate resources to segments. The Company’s total revenues and income (loss) before income taxes and noncontrolling interest (“Pre-tax earnings”) by segment are summarized in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market

 

 

Execution

 

 

Corporate

 

 

Consolidated

 

(in thousands)

 

 

Making

 

 

Services

 

 

(1)

 

 

Total

 

For the three months ended September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

228,582

 

$

39,077

 

$

3,627

 

$

271,286

 

Income (loss) before income taxes and noncontrolling interest

 

 

(19,322)

 

 

(6,017)

 

 

(21,156)

 

 

(46,495)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

161,977

 

$

2,931

 

$

(102)

 

$

164,806

 

Income (loss) before income taxes and noncontrolling interest

 

 

36,888

 

 

1,608

 

 

(622)

 

 

37,874

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Amounts shown in the Corporate segment include eliminations of income statement and balance sheet items included in the Company's other segments.

 

For the nine months ended September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

514,823

 

$

44,964

 

$

3,674

 

$

563,461

 

Income (loss) before income taxes and noncontrolling interest

 

 

17,241

 

 

(4,913)

 

 

(29,749)

 

 

(17,421)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

524,503

 

$

7,224

 

$

(102)

 

$

531,625

 

Income (loss) before income taxes and noncontrolling interest

 

 

138,572

 

 

3,196

 

 

(778)

 

 

140,990

 

18. Related Party Transactions

As of September 30, 2017, and December 31, 2016, the Company had a payable of $0.1 million and $0.2 million to its related parties, respectively, which are included in accounts payable and accrued expenses and other liabilities in condensed consolidated statements of financial condition.

In the ordinary course of business, the Company purchases and leases computer equipment and maintenance and support from affiliates of Dell Inc. (“Dell”). Temasek Holdings (Private) Limited and its affiliates have a significant ownership interest in Dell. Duringfor the three months ended September 30, 20172020 and 2016,2019 are summarized in the Company paid $0.5 million and $0.6 million, respectively, and duringfollowing table:

55
Table of Contents
(in thousands)Market
Making		Execution
Services		CorporateConsolidated
Total
2020    
Total revenue$474,598 $182,680 $(1,166)$656,112 
Income before income taxes and noncontrolling interest161,732 102,029 (11,246)252,515 
2019
Total revenue249,802 133,805 (1,267)382,340 
Income (loss) before income taxes and noncontrolling interest30,375 (29,202)(7,001)(5,828)
The Company's Pre-tax earnings by segment for the nine months ended September 30, 20172020 and 2016,2019 are summarized in the following table:

(in thousands)Market
Making		Execution
Services		CorporateConsolidated
Total
2020
Total revenue$2,064,300 $500,621 $(2,286)$2,562,635 
Income before income taxes and noncontrolling interest1,010,871 137,879 (25,478)1,123,272 
2019
Total revenue762,076 358,325 (2,528)1,117,873 
Income (loss) before income taxes and noncontrolling interest99,876 (95,303)(93,183)(88,610)
22. Related Party Transactions

The Company paid $1.9 millionincurs expenses and $2.1 million, respectively, to Dell for these purchases and leases.

Inmaintains balances with its affiliates in the ordinary course of business,business. As of September 30, 2020, and December 31, 2019 the Company had net receivables from its affiliates of $2.9 million and $1.3 million, respectively.


The Company has held a minority interest in SBI since 2016 (see Note 11 “Financial Assets and Liabilities”). The Company pays exchange fees to SBI for the trading activities conducted on its proprietary trading system. The Company paid $4.1 million and $4.0 million for the three months ended September 30, 2020 and 2019, respectively, and $13.8 million and $10.2 million for the nine months ended September 30, 2020 and 2019, respectively, to SBI for these trading activities.

The Company makes payments to 2 JVs (see Note 2 “Summary of Significant Accounting Policies”) to fund the construction of the microwave communication networks, and to purchase microwave communication networks, which are recorded within Communications and data processing on the Condensed Consolidated Statements of Comprehensive Income. The Company made payments of $4.7 million and $5.2 million for the three months ended September 30, 2020 and 2019, respectively, and $14.0 million and $15.6 million to the JVs for the nine months ended September 30, 2020 and 2019, respectively.

The Company purchases network connections services from affiliates of Level 3 Communications (“Level 3”). Temasek Holdings (Private) Limited and its affiliates have a significant ownership interest in Level 3. DuringThe Company paid $0.4 million and $0.3 million for the three months ended September 30, 20172020 and 2016, the Company paid $0.52019, respectively, and $1.2 million and $0.7$1.1 million respectively, and duringfor the nine months ended September 30, 20172020 and 2016, the Company paid $1.6 million and $1.9 million,2019, respectively, to Level 3 for these services.

In the ordinary course of business, the Company makes payments to two microwave communication networks JVs (See Note 2). 


The Company makes commission-sharing arrangement ("CSA") payments to one JV for the fundingaffiliates of the construction of the microwave communication networksDBS Group Holdings ("DBS"). Temasek and makes payments to the other JV for the use of the microwave communication networksits affiliates have a significant ownership interest in connection with the Company’s trading activities, which are recorded within Communications and data processing on the condensed consolidated statements of comprehensive income (loss).DBS. The Company made payments of $3.9 million and $4.2 million to these JVs$13.0 thousand for the three months and nine ended September 30, 2017, respectively.  The Company made no such payments during2020 and $0.2 million for the threenine months or nine ended September 30, 2016.

2020. Payments for the three and nine months ended September 30, 2019 were immaterial.

44


As described in Note 10 “Borrowings” and Note 18 “Capital Structure”, on March 20, 2020 a subsidiary of the Company entered into an agreement with the Founder Member to establish the Founder Member Facility and, upon the execution of the Founder Member Facility and in consideration of the Founder Member’s commitments thereunder, the Company delivered to the Founder Member the Warrant. The transactions were unanimously approved by the Company’s disinterested Directors. The Founder Member Loan Term expired as of September 20, 2020.

56
Table of Contents

19.

23. Subsequent Events


The Company has evaluated subsequent events for adjustment to or disclosure in its condensed consolidated financial statements through the date of thethis report, and has not identified any recordable or disclosable events, not otherwise reported in these condensed consolidated financial statements or the notes thereto, except for the following: 

On October 24, 2017, Virtu Financial entered into an Asset Purchase Agreement with Intercontinental Exchange, Inc. ("ICE") pursuant to which Virtu Financial agreed to sell specified assets and assign specified liabilities constituting the Company's BondPoint division and fixed income venue ("BondPoint").  BondPoint is a provider of electronic fixed income trading solutions for the buy-side and sell-side offering access to centralized liquidity and automated trade execution services.  The purchase price payable by ICE for BondPoint as the closing of the transaction is $400.0 million in cash, subject to a customary adjustment for working capital of BondPoint.  The consummation of the transaction is subject to the satisfaction of customary closing conditions and receipt of certain regulatory clearances, including from the Financial Industry Regulatory Authority, Inc., and the Municipal Securities Rulemaking Board and the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. 

On October 24, 2017, Joseph J. Grano Jr. was appointed as a Class II director of the Board of Directors of the Company.


On November 3, 2017, a subsidiary of the Company entered into a definitive agreement to sell select infrastructure and telecommunications assets for a purchase price of $4.2 million in cash subject to a customary adjustment for working capital. The consummation of the transaction is subject to customary closing conditions including applicable regulatory approvals.

On November 4, 2017,6, 2020, the Company’s broker dealer subsidiaries entered into a committed broker dealer revolving credit facility (the “Broker Dealer Revolving Facility”) with a syndicateboard of lenders with a total aggregate committed amount of $500.0 million, subject to two borrowing bases, the proceeds of which may be used to finance the purchase and settlement of securities and to fund certain clearing deposits.  The Broker Dealer Revolving Facility is fully and unconditionally guaranteed by Virtu Financial and certain other affiliates and is secured by pledges of eligible securities and deposits.

The Company’s Board of Directorsdirectors declared a dividend of $0.24 per share of Class A common stockCommon Stock and Class B common stockCommon Stock and restricted stock unit on November 7, 2017, payableper participating Restricted Stock Unit and Restricted Stock Award that will be paid on December 15, 20172020 to holders of record as of the close of business on December 1, 2017.

2020.


45

On November 6, 2020, the Company’s board of directors authorized a new share repurchase program of up to $100.0 million in Class A common stock and Virtu Financial Units by December 31, 2021. The Company may repurchase shares from time to time in open market transactions, privately negotiated transactions or by other means. Repurchases may also be made under Rule 10b5-1 plans. The timing and amount of repurchase transactions will be determined by the Company’s management based on its evaluation of market conditions, share price, legal requirements and other factors. The program may be suspended, modified or discontinued at any time without prior notice. There are no assurances that any repurchases will actually occur.
57

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

- IN PROGRESS

The following management’s discussion and analysis of the financial condition and results of operations covers the three and nine months ended September 30, 20172020 and 2016,2019 and should be read in conjunction with the condensed consolidated financial statements of Virtu Financial, Inc. (the “Company”) for the three and nine monthsperiod ended September 30, 20172020, which are included in Part I, Item I of this Quarterly Report on Form 10-Q, and 2016.the audited consolidated financial statements and accompanying notes and MD&A for the year ended December 31, 2019, which are included in Items 8 and 7, respectively, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. This management's discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Unless otherwise stated, all amounts are presented in thousands of dollars.

Forward-Looking Statements

This quarterly reportQuarterly Report on Form 10-Q contains forward-looking statements. You should not place undue reliance on forward-looking statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project” or, in each case, their negative, or other variations or comparable terminology and expressions. These statements are based on assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this quarterly reportQuarterly Report on Form 10-Q, you should understand that theseforward-looking statements are not guarantees of performance or results and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this quarterly reportQuarterly Report on Form 10-Q. By their nature, forward-looking statements involve known and unknown risks and uncertainties, including those described under the heading “Risk Factors” in our Annualthis Quarterly Report for the year ended December 31, 2016 on Form 10-K and those described in Part 2, Item 1A,10-Q, because they relate to events and depend on circumstances that may or may not occur in the future. Although we believe that the forward-looking statements contained in this quarterly reportQuarterly Report on Form 10-Q are based on reasonable assumptions, you should be aware that many factors, including those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20162019, as filed with the Securities and Exchange Commission ("SEC") on February 28, 2020 (the "2019 Form 10-K,10-K"), could affect our actual financial results or results of operations and cash flows, and could cause actual results to differ materially from those in such forward-looking statements, including but not limited to:

·

reduced levels of overall trading activity;

·

dependence upon trading counterparties and clearing houses performing their obligations to us;

•the continuing impacts of COVID-19 and the governmental and other responses thereto, including but not limited to the deployment of our business continuity plan pursuant to which a significant number of our employees currently work remotely and our return to office plan, each of which may increase operational risk, as well as increases in market, counterparty and other forms of operational risk;

·

failures of our customized trading platform;

•reduced levels of overall trading activity;

·

risks inherent to the electronic market making business and trading generally;

•dependence upon trading counterparties and clearing houses performing their obligations to us;

·

increased competition in market making activities;

•failures of our customized trading platform;

·

dependence on continued access to sources of liquidity;

•risks inherent to the electronic market making business and trading generally;

·

risks associated with self‑clearing and other operational elements of our business;

•increased competition in market making activities and execution services;

·

compliance with laws and regulations, including those specific to our industry;

•dependence on continued access to sources of liquidity;

·

obligation to comply with applicable regulatory capital requirements;

•risks associated with self-clearing and other operational elements of our business;

·

litigation or other legal and regulatory‑based liabilities;

•obligations to comply with applicable regulatory capital requirements;

·

proposed legislation that would impose taxes on certain financial transactions in the European Union, the U.S. and other jurisdictions;

•litigation or other legal and regulatory-based liabilities;

·

obligation to comply with laws and regulations applicable to our international operations;

•proposed legislation that would impose taxes on certain financial transactions in the European Union, the U.S. (and certain states therein) and other jurisdictions;

46

•obligations to comply with laws and regulations applicable to our operations in the U.S. and abroad;

•enhanced media and regulatory scrutiny and its impact upon public perception of us or of companies in our industry;

58
Table of Contents

·

enhanced media and regulatory scrutiny and its impact upon public perception of us or of companies in our industry;

•need to maintain and continue developing proprietary technologies;

·

need to maintain and continue developing proprietary technologies;

•the effect of the ITG Acquisition (as defined below) on existing business relationships, operating results, and ongoing business operations generally;

·

failure to maintain system security or otherwise maintain confidential and proprietary information;

•the significant costs and significant indebtedness that we have incurred in connection with the ITG Acquisition, and the integration of ITG (as defined below) into our business;

·

the effect of the Acquisition of KCG (as defined below) on existing business relationships, operating results, and ongoing business operations generally; 

•the risk that we may encounter significant difficulties or delays in integrating the ITG business with ours and that the anticipated benefits, cost savings and synergies or capital release may not be achieved;

·

the significant costs and significant indebtedness that we incurred in connection with the Acquisition of KCG, and the integration of KCG into our business;

•the assumption of potential liabilities and risks relating to ITG's business;

·

the risk that we may encounter significant difficulties or delays in integrating the two businesses and the anticipated benefits, costs savings and synergies or capital release may not be achieved;

•capacity constraints, system failures, and delays;

·

the assumption of potential liabilities relating to KCG’s business;

•dependence on third party infrastructure or systems;

·

capacity constraints, system failures, and delays, including those which could arise in connection with the data center migration described in Part 2, Item 1A of this quarterly report;

•use of open source software;

·

dependence on third party infrastructure or systems;

•failure to protect or enforce our intellectual property rights in our proprietary technology;

·

use of open source software;

•failure to protect confidential and proprietary information;

·

failure to protect or enforce our intellectual property rights in our proprietary technology;

•failure to protect our systems from internal or external cyber threats that could result in damage to our computer systems, business interruption, loss of data or other consequences;

·

risks associated with international operations and expansion, including failed acquisitions or dispositions;

•risks associated with international operations and expansion, including failed acquisitions or dispositions;

·

the effects of and changes in economic conditions (such as volatility in the financial markets, inflation, monetary conditions and foreign currency and exchange rate fluctuations, foreign currency controls and/or government mandated pricing controls, as well as in trade, monetary, fiscal and tax policies in international markets) and political conditions (such as military actions and terrorist activities);

•the effects of and changes in economic conditions (such as volatility in the financial markets, inflation, monetary conditions and foreign currency and exchange rate fluctuations, foreign currency controls and/or government mandated pricing controls, as well as in trade, monetary, fiscal and tax policies in international markets), political conditions (such as military actions and terrorist activities), and other global events such as fires, natural disasters, pandemics or extreme weather;

·

risks associated with potential growth and associated corporate actions;

•risks associated with potential growth and associated corporate actions;

·

inability to, or delay, in accessing the capital markets to sell shares or raise additional capital;

•inability to access, or delay in accessing the capital markets to sell shares or raise additional capital;

·

loss of key executives and failure to recruit and retain qualified personnel; and

•loss of key executives and failure to recruit and retain qualified personnel; and

·

risks associated with losing access to a significant exchange or other trading venue.

•risks associated with losing access to a significant exchange or other trading venue.


Our forward-looking statements made herein are made only as of the date of this quarterly report.Quarterly Report on Form 10-Q. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements made herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this quarterly report.

Quarterly Report on Form 10-Q.


Basis of Preparation


Our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 20172020 and 20162019 reflect our operations and those of our consolidated subsidiaries.As discussed in Note 1 “Organization and Basis of Presentation” and in Note 3 ““Merger of Virtu Financial, Inc.and KCG Holdings Inc.”“ITG Acquisition” of Part I Item 1 “Condensed Consolidated Financial Statements (Unaudited)”“Financial Statements” of this Quarterly Report on Form 10-Q, , we are accountinghave accounted for the acquisition of KCG Holdings, Inc. (“KCG”)ITG Acquisition under the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of KCG,Investment Technology Group, Inc. ("ITG"), as of July 20, 2017March 1, 2019 (the “Closing Date”"ITG Closing Date"), were recorded at their

47

Table of Contents

respective fair values and added to the carrying value of our existing assets and liabilities. Our reported financial condition, and results of operations and cash flows for the periods following the MergerITG Closing Date reflect KCG'sITG's and our balances, and reflect the impact of purchase accounting adjustments, including revised amortization and depreciation expense for acquired assets. As we are the accounting acquirer, theThe financial results for the three and nine months ended September 30, 20172019 comprise our results for the entire applicable period and the results of KCGITG from the ITG Closing Date through September 30, 2017.2019. All periods prior to the ITG Closing Date comprise solely our results.

results without the results of ITG.


59
Table of Contents
Recent Developments

The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19 has caused, among other matters, illness, death, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market volatility and instability. The United States now has the world’s most reported COVID-19 cases, and all 50 states and the District of Columbia have reported cases of infected individuals. Similar impacts have been experienced in every country in which we do business. The Company has been impacted in various ways by the COVID-19 outbreak, including experiencing elevated levels of trading volumes and market volatility in the markets in which we operate during certain periods, which contributed positively to our results, and increases in short term funding requirements with clearing houses and counterparties as a consequence of these elevated trading volumes and market volatility. The Company also implemented its business continuity plan, including remote work arrangements for the majority of our employees during this pandemic.

We will continue to monitor the impact of COVID-19, but at the date of this report it is too early to determine the full impact this virus may have on the global financial markets and the overall economy, as well as our business. Should this emerging macro-economic risk continue for an extended period, there could be an adverse material financial impact to the Company's businesses and investments, including a material reduction in the Company's results of operations. For more information on the potential impacts of the COVID-19 outbreak on our business, see Part II Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q.

Overview


We are a leading financial services firm that leverages cutting edge technology to deliver liquidity to the global markets and innovative, transparent trading solutions to our clients. Leveraging our global market structure expertise and scaled, multi-asset technology infrastructure, we provide our clients with a robust product suite including offerings in execution, liquidity sourcing, analytics and broker-neutral, multi-dealer platforms in workflow technology. Our product offerings allow our clients to trade on hundreds of venues across over 50 countries and in multiple asset classes, including global equities, ETFs, foreign exchange, futures, fixed income and other commodities. Our integrated, multi-asset analytics platform provides a range of pre and post-trade services, data products and compliance tools that our clients rely upon to invest, trade and manage risk across global markets. We believe that our broad diversification, in combination with our proprietary technology platform and low-cost structure enablesgives us the scale necessary to grow our business around the globe as we service clients and facilitate risk transfer between global capital markets participants by supplying competitiveproviding liquidity, and execution services while at the same time earning attractive margins and returns.


Technology and operational efficiency are at the core of our business, and our focus on technology is a key element of our success. We have developed a proprietary, multi-asset, multi-currency technology platform that is highly reliable, scalable and modular, and we integrate directly with exchanges, liquidity centers, and our clients. Our market data, order routing, transaction processing, risk management and market surveillance technology modules manage our market making and execution services activities in an efficient manner and enable us to scale our activities globally across additional securities and other financial instruments and asset classes without significant incremental costs or third party licensing or processing fees.

We believe that technology-enabled market makers and execution services providers like Virtu serve an important role in maintaining and improvingenhancing the overall health and efficiency of the global capital markets by continuously posting bids and offers for financial instruments and thereby providingensuring that market participants a transparent andhave an efficient means to invest, transfer risk. Allrisk and analyze the quality of executions. We believe that market participants benefit from the increased liquidity, lower overall trading costs and execution certaintytransparency that Virtu provides.

We refer to our traditional market making activities as being “market neutral”, which means that we are not dependent on the direction of a particular market


Our execution services and do not speculate. These activitiesclient solutions products are designed to minimize capital at risk at any given time by limitingbe transparent, because we believe transparency makes markets more efficient and helps investors make better, more informed decisions. We use the notional sizelatest technology to create and deliver liquidity to global markets and innovative trading solutions and analytics tools to our clients. We interact directly with hundreds of our positions. We avoidretail brokers, Registered Investment Advisors, private client networks, sell-side brokers, and buy-side institutions.

On July 20, 2017 (the "KCG Closing Date"), the risk of long or short positions in favor of earning small bid/ask spreads on large trading volumes across thousands of securities and financial instruments.

Our revenue generation is driven primarily by transaction volume across a broad range of securities, asset classes and geographies. We also generate revenue from interest and dividends on securities that we hold from time to time in connection with our market making activities. We believeCompany completed the overall level of volumes and realized volatility in the various markets we serve have the greatest impact on our businesses. Increases in market volatility can cause bid/ask spreads to widen as market participants are more willing to pay market makers like Virtu to transact immediately.

As described in “Acquisition of KCG” below, on the Closing Date, we completed our acquisitionall-cash Acquisition of KCG Holdings.Holdings, Inc. ("KCG"). KCG was a leading independent securities firm offering clients a range of services designed to address trading needs across asset classes, product types and time zones. KCG combined advancedgeographies.


60
Table of Contents
As described below, we completed the ITG Acquisition on the ITG Closing Date. ITG was a global financial technology with specialized client service across market making, agencycompany that offered a suite of trading and financial technology products to help leading brokers and asset managers improve returns for investors around the world. ITG empowered traders and investors to reduce the end-to-end cost of implementing investments via liquidity, execution, analytics and trading venues and also engaged in principal trading via exchange-based electronic market making. KCG offered multiple access points to trade global equities, options, futures, fixed income, currencies and commodities via voice or automated.

Prior to the Acquisition of KCG, Virtu operated as a single reportable business segment. As a result of the Acquisition of KCG, beginning in the third quarter of 2017, Virtu has threeworkflow technology solutions.


We have two operating segments: Market Making and Execution Services, and one non-operating segment: Corporate. Our management allocates resources, assesses performance and manages our business according to these segments:

•segments.


Market Making: As a market maker, Virtu providesMaking

We leverage cutting edge technology to provide competitive and deep liquidity that helps to create more efficient markets around the world. WeAs a market maker and liquidity provider, we stand ready, at any time, to buy or sell a broad range of securities, and we generate revenueprofits by buying and selling large volumes of securities and other financial instruments and earning small bid/ask spreads. Our market structure expertise, broad diversification, and scalable execution technology enablesenable us to provide competitive bids and offers in over 19,00025,000 securities atand other financial instruments, on over 235 venues, in 36 countries worldwide.

•Technology We use the latest technology to create and deliver liquidity to the global markets and automate our market making, risk controls, and post-trade processes. As a market maker, we interact directly with hundreds of retail brokers, Registered Investment Advisors, private client networks, sell-side brokers, and buy-side institutions.


We believe the overall level of volumes and realized volatility in the various markets we serve have the greatest impact on our market making businesses. Increases in market volatility can cause bid/ask spreads to widen as market participants are more willing to pay market makers like us to transact immediately and as a result, market makers' capture rate per notional amount transacted increases.

Execution Services: includes agencyServices

We offer client execution services and trading venues offeringthat provide transparent trading in global equities, ETFs, futuresfixed income, currencies, and fixed incomecommodities to institutions, banks and broker dealers.broker-dealers. We generally earn commissions when transacting as an agent between principals for transactions. Agency based,our clients. Client-based, execution-only trading in thewithin this segment is done primarily through a variety of access points including: (a) algorithmic trading and order routing; (b) institutional sales traders who offer portfolio trading and single stock sales trading which provides execution expertise

48

Table of Contents

for program, block and riskless principal trades in global equities and ETFs; and (c) matching of client conditional orders in Virtu BondPoint (our fixed income ECN)POSIT Alert and in our ATSs, including Virtu MatchIt (our Alternative Trading System (“ATS”) for U.S. equities,and POSIT. We also earn technology services revenues (a) by providing our proprietary technology and infrastructure to select third parties.

•Corporate: parties for a service fee, (b) through workflow technology and our integrated, broker-neutral trading tools delivered across the globe, including order and execution management systems and order management software applications and network connectivity and (c) through trading analytics, including (1) tools enabling portfolio managers and traders to improve pre-trade, real-time and post-trade execution performance, (2) portfolio construction and optimization decisions and (3) securities valuation.


Corporate

Our Corporate segment contains investments principally in strategic financial services-oriented opportunities and maintains corporate overhead expenses and all other income and expenses that are not attributable to our other segments.

We believe that


Acquisition of Investment Technology Group, Inc.

On March 1, 2019, the most relevant asset class distinctionsITG Closing Date, we announced the completion of the ITG Acquisition, a cash transaction valued at $30.30 per ITG share, or a total of approximately $1.0 billion. In connection with the ITG Acquisition, Virtu Financial, VFH, and venuesthe Acquisition Borrower entered into the Credit Agreement, with the lenders party thereto, Jefferies Finance LLC, as administrative agent and Jefferies Finance LLC and RBC Capital Markets, as joint lead arrangers and joint bookrunners. The Credit Agreement provided (i) the First Lien Term Loan Facility (as defined below) in an aggregate principal amount of $1.5 billion, drawn in its entirety on the ITG Closing Date, with approximately $404.5 million borrowed by VFH to repay all amounts outstanding under its existing term loan facility and the remaining approximately $1,095.0 million borrowed by the Acquisition Borrower to finance the consideration and fees and expenses to be paid in connection with the ITG Acquisition, and (ii) the First Lien Revolving Facility (as defined below), with a $5.0 million letter of credit subfacility and a $5.0 million swingline subfacility. After the closing of the ITG Acquisition, VFH assumed the obligations of the Acquisition Borrower in respect of the acquisition term loans. Additionally, on the ITG Closing Date, the Company’s fourth amended and restated credit agreement, dated as of June 30, 2017 (as amended on January 2, 2018 and September 19, 2018, the “Fourth Amended and Restated Credit Agreement”) was terminated.

61
Table of Contents
As described below, the Credit Agreement was amended on October 9, 2019, on which date VFH borrowed and additional $525.0 million of incremental first lien term loans, the proceeds of which were used together with cash on hand to redeem the Notes (as defined below). The Indenture (as defined below) was fully terminated following such redemption. The Credit Agreement was further amended on March 2, 2020 to, among other things, reduce the interest rate spread over LIBOR or the applicable benchmark by 0.50%.

Amended and Restated 2015 Management Incentive Plan

The Company’s board of directors and stockholders adopted the 2015 Management Incentive Plan, which became effective upon consummation of the Company's IPO and was subsequently amended and restated following receipt of approval from the Company’s stockholders on June 30, 2017 (the “Amended and Restated 2015 Management Incentive Plan”). The Amended and Restated 2015 Management Incentive Plan provides for the markets we serve includegrant of stock options, restricted stock units, and other awards based on an aggregate of 16,000,000 shares of Class A common stock, par value $0.00001 per share (the “Class A Common Stock”), subject to additional sublimits, including limits on the following:

Asset

Classes

Selected Venues in Which We Make Markets

Americas Equities

Aequitas Neo, BATS, BM&F Bovespa, CHX, CME, ICE, IEX, NASDAQ, NYSE,  NYSE Arca, NYSE MKT, TMX, major private liquidity pools

Rest Of World (“ROW”) Equities

Amsterdam, Aquis, BATS Europe, Bolsa de Madrid, Borsa Italiana, Brussels, EUREX, Euronext -Paris, ICE Futures Europe, Johannesburg Stock Exchange, Lisbon, London Stock Exchange,  SIX Swiss Exchange, Turquoise Exchange, XETRA, OSE, SBI Japannext, SGX, TOCOM, TSE

Global Fixed Income, Currencies, Commodities (“FICC”), Options and Other

CME, EBS, ICE, ICE Futures Europe, NASDAQ Energy Exchange, SGX, TOCOM, Currenex, EBS, HotSpot, ICE, LMAX, Reuters/FXall, BOX, BrokerTec, CBOE, eSpeed, NYSE Arca Options, PHLX

Acquisitiontotal option grant to any one participant in a single year and the total performance award to any one participant in a single year. On April 23, 2020, the Company’s board of KCG

directors adopted an amendment to the Company’s Amended and Restated 2015 Management Incentive Plan in order to increase the number of shares of the Company’s Class A Common Stock reserved for issuance, and in respect of which awards may be granted under the Amended and Restated 2015 Plan from 16,000,000 shares of Class A Common Stock to an aggregate of 21,000,000 shares of Class A Common Stock and the amendment was approved by the Company’s shareholders at the Company's annual meeting of shareholders on June 5, 2020.


In connection with the IPO, non-qualified stock options to purchase 9,228,000 shares were granted at the IPO per share price, each of which vests in equal annual installments over a period of four years from the grant date and expires not later than 10 years from the grant date. Subsequent to the IPO and through September 30, 2020, options to purchase 1,628,750 shares in the aggregate were forfeited and 5,173,098 options were exercised. The fair value of the stock option grants was determined through the application of the Black-Scholes-Merton model and was recognized on a straight-line basis over the vesting period. In connection with and subsequent to the IPO, 1,677,318 shares of immediately vested Class A Common Stock and 2,620,051 restricted stock units were granted, which vest over a period of up to 4 years and are settled in shares of Class A Common Stock. The fair value of the Class A Common Stock and restricted stock units was determined based on the volume weighted average price for the three days preceding the grant, and with respect to the restricted stock units is recognized on a straight-line basis over the vesting period.

Amended and Restated Investment Technology Group, Inc. 2007 Omnibus Equity Compensation Plan

On the ITG Closing Date, the Company completedassumed the all-cash acquisitionAmended and Restated ITG 2007 Omnibus Equity Compensation Plan, dated as of June 8, 2017 (the “Acquisition”“Amended and Restated ITG 2007 Equity Plan”) of KCG. Pursuantand certain stock option awards, restricted stock unit awards, deferred stock unit awards and performance stock unit awards granted under the Amended and Restated ITG 2007 Equity Plan (the “Assumed Awards”). The Assumed Awards are subject to the same terms and conditions that were applicable to them under the Amended and Restated ITG 2007 Equity Plan, except that (i) the Assumed Awards relate to shares of the Company’s Class A Common Stock, (ii) the number of shares of Class A Common Stock subject to the Assumed Awards was the result of an adjustment based upon an Exchange Ratio (as defined in the Agreement and Plan of Merger dated as of April 20, 2017 (the “Merger Agreement”), by and amongbetween the Company, OrchestraImpala Merger Sub, Inc., a Delaware corporation and an indirect wholly-owned subsidiary of the Company (“Merger Sub”), and KCG, Merger Sub merged with and into KCG (the “Merger”), with KCG surviving the Merger as a wholly owned subsidiary of the Company.

In connection with the financing of the Acquisition, on the Closing Date, the Company issued to (i) Aranda Investments Pte. Ltd. (“Aranda”), an affiliate of Temasek, 6,346,155 shares of the Company’s Class A Common Stock for an aggregate purchase price of approximately $99.0 million and (ii) North Island Holdings I, LP (“NIH”) 39,725,979 shares of the Company Class A Common Stock for an aggregate purchase price of approximately $613.5 million. On August 10, 2017, the Company issued additional 1,666,666 shares and 338,124 shares of the Company Class A Common Stock to Aranda and NIH respectively, for an aggregate additional purchase price of approximately $26.0 million and $5.2 million, respectively.

Also in connection with the financing of the Acquisition, on June 16, 2017, Orchestra Borrower LLC, a wholly owned subsidiary of Virtu Financial (the “Escrow Issuer”) and Orchestra Co-Issuer, Inc. (the “Co-Issuer”) completed the offering of $500 million aggregate principal amount of 6.750% Senior Secured Second Lien Notes due 2022 (the “Notes”). On July 20, 2017, VFH Parent LLC (“VFH”), a wholly owned subsidiary of Virtu Financial, assumed all of the obligations of the Escrow Issuer under the Indenture and the Notes.

On June 30, 2017, Virtu Financial and VFH entered into a fourth amended and restated credit agreement (the “Fourth Amended and Restated Credit Agreement”) with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, sole lead arranger and bookrunner, which amended and restated in its entirety VFH’s existing Credit Agreement.  The Fourth Amended and Restated Credit Agreement, provided for a $540.0 million first lien secured

49

Table of Contents

term loan, drawn in its entirety on the Closing Date, and continued VFH’s existing $100.0 million first lien senior secured revolving credit facility.  Also on June 30, 2017, Orchestra Borrower LLC (the “Escrow Issuer”), a wholly owned subsidiary of the Company, enteredand ITG, dated as of November 6, 2018, the “ITG Merger Agreement”) and (iii) the performance share unit awards were converted into an escrow credit agreement (the “Escrow Credit Agreement”) with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, sole lead arranger and bookrunner, which provided for a $610.0 million term loan, the proceeds of whichservice-based vesting restricted stock unit awards that were deposited into escrow pending the closingno longer subject to any performance based vesting conditions. As of the Acquisition (the “Escrow Term Loan”) and which was assumed by VFH as of theITG Closing Date, under the Fourthaggregate number of shares of Class A Common Stock subject to such Assumed Awards was 2,497,028 and the aggregate number of shares of Class A Common Stock that remained issuable pursuant to the Amended and Restated Credit Agreement.

On July 21, 2017,ITG 2007 Equity Plan was 1,230,406. The Company filed a Registration Statement on Form S-8 on the outstanding 6.875% Senior Secured Notes dueITG Closing Date to register such shares of Class A Common Stock.


62
Table of Contents
Parent Company Financial Information

There are no material differences between our condensed consolidated financial statements and the financial statements of Virtu Financial except as follows: (i) cash and cash equivalents reflected on our Condensed Consolidated Statement of Financial Condition as of September 30, 2020 issued by KCG were redeemed atin the amount of $0.1 million; (ii) deferred tax assets reflected on our Condensed Consolidated Statement of Financial Condition as of September 30, 2020 in the amount of $176.2 million and tax receivable agreement obligation in the amount of $256.0 million, in each case as described in greater detail in Note 6 “Tax Receivable Agreements” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q; (iii) current income tax receivable within Other Assets on the Condensed Consolidated Statement of Financial Condition as of September 30, 2020 in the amount of $85.5 million, (iv) a redemption price equal to 103.438%portion of the principal amount, plus accrued and unpaidmember's equity of Virtu Financial is represented as non-controlling interest pursuant to the indenture, datedon our Condensed Consolidated Statement of Financial Condition as of March 13, 2015 (as amended, restated, supplemented or otherwise modified), bySeptember 30, 2020; and among KCG,(v) provision for corporate income tax in the subsidiary guarantors party theretoamount of $32.1 million and The Bank$152.8 million reflected on our Condensed Consolidated Statements of New York Mellon, as trusteeComprehensive Income for the three and collateral agent.

nine months ended September 30, 2020, respectively.


63
Table of Contents
Components of Our Results of Operations


The following table sets forth: (i)shows our i) Total revenue, (ii)ii) Total operating expenses, and (iii)iii) Income (loss) before income taxes and noncontrolling interest by segment for the three and nine months ended September 30, 2020 and 2019:

(in thousands)Three Months Ended September 30,Nine Months Ended September 30,
Market Making2020201920202019
Total revenue$474,598 $249,802 $2,064,300 $762,076 
Total operating expenses312,866 219,427 1,053,429 662,200 
Income before income taxes and noncontrolling interest161,732 30,375 1,010,871 99,876 
Execution Services
Total revenue182,680 133,805 500,621 358,325 
Total operating expenses80,651 163,007 362,742 453,628 
Income (loss) before income taxes and noncontrolling interest102,029 (29,202)137,879 (95,303)
Corporate
Total revenue(1,166)(1,267)(2,286)(2,528)
Total operating expenses10,080 5,734 23,192 90,655 
Income (loss) before income taxes and noncontrolling interest(11,246)(7,001)(25,478)(93,183)
Consolidated
Total revenue656,112 382,340 2,562,635 1,117,873 
Total operating expenses403,597 388,168 1,439,363 1,206,483 
Income (loss) before income taxes and noncontrolling interest$252,515 $(5,828)$1,123,272 $(88,610)

The following table shows our results of our segmentsoperations for the three and on a consolidated basis (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(in thousands)

    

2017

    

2016

    

2017

    

2016

 

Market Making

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

228,582

 

$

161,977

 

$

514,823

 

$

524,503

 

Total operating expenses

 

 

247,904

 

 

125,089

 

 

497,582

 

 

385,931

 

Income (loss) before income taxes and noncontrolling interest

 

 

(19,322)

 

 

36,888

 

 

17,241

 

 

138,572

 

Global Execution Services

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

39,077

 

 

2,931

 

 

44,964

 

 

7,224

 

Total operating expenses

 

 

45,094

 

 

1,323

 

 

49,877

 

 

4,028

 

Income (loss) before income taxes and noncontrolling interest

 

 

(6,017)

 

 

1,608

 

 

(4,913)

 

 

3,196

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

3,627

 

 

(102)

 

 

3,674

 

 

(102)

 

Total operating expenses

 

 

24,783

 

 

520

 

 

33,423

 

 

676

 

Income (loss) before income taxes and noncontrolling interest

 

 

(21,156)

 

 

(622)

 

 

(29,749)

 

 

(778)

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

271,286

 

 

164,806

 

 

563,461

 

 

531,625

 

Total operating expenses

 

 

317,781

 

 

126,932

 

 

580,882

 

 

390,635

 

Income (loss) before income taxes and noncontrolling interest

 

$

(46,495)

 

$

37,874

 

$

(17,421)

 

$

140,990

 

nine months ended September 30, 2020 and 2019:

50


Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2020201920202019
Revenues:
Trading income, net$441,295 $220,148 $1,987,756 $683,611 
Interest and dividends income10,932 23,352 46,788 76,645 
Commissions, net and technology services133,853 139,627 452,333 359,894 
Other, net70,032 (787)75,758 (2,277)
Total revenue656,112 382,340 2,562,635 1,117,873 
Operating Expenses:
Brokerage, exchange, clearance fees and payments for order flow, net196,448 98,789 573,769 285,890 
Communication and data processing51,647 59,767 162,336 156,004 
Employee compensation and payroll taxes35,798 90,595 327,091 282,135 
Interest and dividends expense27,374 34,546 97,656 116,739 
Operations and administrative24,612 25,333 73,480 76,293 
Depreciation and amortization16,656 17,598 50,728 48,859 
Amortization of purchased intangibles and acquired capitalized software18,265 18,908 56,177 50,436 
Termination of office leases60 1,278 343 66,490 
Debt issue cost related to debt refinancing, prepayment and commitment fees9,916 — 27,282 7,894 
Transaction advisory fees and expenses2,463 7,163 2,737 24,074 
Financing interest expense on long-term borrowings20,358 34,191 67,764 91,669 
Total operating expenses403,597 388,168 1,439,363 1,206,483 
Income (loss) before income taxes and noncontrolling interest252,515 (5,828)1,123,272 (88,610)
Provision for (benefit from) income taxes52,807 (644)200,044 (14,322)
Net income (loss)$199,708 $(5,184)$923,228 $(74,288)

64
Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

(in thousands, except share and per share data)

    

2017

    

2016

    

2017

    

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

203,907

 

$

156,706

 

$

479,644

 

$

509,542

 

Interest and dividends income

 

 

20,430

 

 

5,271

 

 

30,933

 

 

14,961

 

Commissions, net and technology services

 

 

43,351

 

 

2,931

 

 

49,237

 

 

7,224

 

Other, net

 

 

3,598

 

 

(102)

 

 

3,647

 

 

(102)

 

Total revenue

 

 

271,286

 

 

164,806

 

 

563,461

 

 

531,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Brokerage, exchange and clearance fees, net

 

 

64,584

 

 

52,118

 

 

170,253

 

 

167,416

 

Communication and data processing

 

 

45,998

 

 

17,903

 

 

83,190

 

 

53,578

 

Employee compensation and payroll taxes

 

 

72,341

 

 

20,816

 

 

111,053

 

 

64,182

 

Payments for order flow

 

 

12,071

 

 

 —

 

 

12,071

 

 

 —

 

Interest and dividends expense

 

 

31,242

 

 

15,615

 

 

58,456

 

 

43,249

 

Operations and administrative

 

 

24,183

 

 

5,543

 

 

38,107

 

 

16,198

 

Depreciation and amortization

 

 

15,602

 

 

7,158

 

 

29,157

 

 

22,685

 

Amortization of purchased intangibles and acquired capitalized software

 

 

6,440

 

 

53

 

 

6,546

 

 

159

 

Debt issue cost related to debt refinancing

 

 

4,869

 

 

 —

 

 

9,351

 

 

 —

 

Transaction advisory fees and expenses

 

 

15,677

 

 

 —

 

 

24,188

 

 

155

 

Reserve for legal matter

 

 

 —

 

 

 —

 

 

(2,176)

 

 

 —

 

Charges related to share based compensation at IPO

 

 

181

 

 

333

 

 

545

 

 

1,444

 

Financing interest expense on long-term borrowings

 

 

24,593

 

 

7,393

 

 

40,141

 

 

21,569

 

Total operating expenses

 

 

317,781

 

 

126,932

 

 

580,882

 

 

390,635

 

Income (loss) before income taxes and noncontrolling interest

 

 

(46,495)

 

 

37,874

 

 

(17,421)

 

 

140,990

 

Provision for (benefit from) income taxes

 

 

(6,505)

 

 

4,851

 

 

(2,918)

 

 

17,325

 

Net income (loss)

 

 

(39,990)

 

$

33,023

 

$

(14,503)

 

$

123,665

 

Total Revenues


Revenues are generated through market marking activities, commissions and fees on execution services activities, which include recurring subscriptions on workflow technology and analytic products. The majority of our revenue isrevenues are generated through market making activities, and iswhich are recorded as tradingTrading income, net. In addition, we generate revenues from interestnet and Interest and dividends incomeincome. Commissions and fees are derived from commissions charged for trade executions in client execution services. We earn commissions and commission equivalents, as well as, in certain cases, contingent fees based on client revenues, which represent variable consideration. The services offered under these contracts have the salesame pattern of licensedtransfer; accordingly, they are being measured and recognized as a single performance obligation. The performance obligation is satisfied over time, and accordingly, revenue is recognized as time passes. Variable consideration has not been included in the transaction price as the amount of consideration is contingent on factors outside our control.

Recurring revenues are primarily derived from workflow technology services revenueconnectivity fees generated by using our proprietary technology to provide technology infrastructurefor matching client orders, and agency executionanalytics services to select third parties.Following Revenues from connectivity fees are recognized and billed to clients on a monthly basis. Revenues from commissions attributable to analytic products under bundled arrangements are recognized over the Acquisition, we also earn commissions and commission equivalents from executing trades on behalfcourse of institutional clients.

the year as the performance obligations for those analytics products are satisfied.


Trading Income, Net. income, net.Trading income, net represents revenue earned from bid/ask spreads. Trading income is generated in the normal course of our market making activities and is typically proportional to the level of trading activity, or volumes, and bid/ask spreads in the asset classes we serve. Our trading income is highly diversified by asset class and geography and is comprised of small amounts earned on millions of trades on various exchanges, primarily in Americas, EMEAthe following two categories: (i) Global Equities and APAC equities, global currencies, global commodities, including energy(ii) Global FICC, Options and metals, and options, fixed income and other securities. Trading income, net, includes trading income earned from bid/ask spreads.Other. Our trading income, net, results from gains and losses associated with economically neutral trading strategies, which are designed to capture small bid askbid-ask spreads, and often involve making markets in a derivative versus a correlated instrument that is not a derivative. These transactions often result in a gain or loss on the derivative and a corresponding loss or gain on the non-derivative.while hedging risks. Trading income, net, accounted for approximately 75%78% and 95% of our total revenues for the three months ended September 30, 2017 and 2016, respectively, and 85% and 96%61% of our total revenues for the nine months ended September 30, 20172020 and 2016,2019, respectively.


Interest and Dividends Income. dividends income.Our market making activities require us to hold securities on a regular basis, and we generate revenues in the form of interest and dividends income from these securities. Interest is also earned on securities borrowed from other market participants pursuant to collateralized financing arrangements and on cash held by brokers. Dividends income arises from holding market-makingmarket making positions over dates on which dividends are paid to shareholders of record.


Commissions, Netnet and Technology Services. Technology services revenues include technology licensing fees and agency commission fees. Technology licensing fees are charged for the licensing of our proprietary technology and

51

Table of Contents

the provision of related services, including hosting, management and support. These fees include an up-front component and a recurring fee for the relevant term, which may include both a fixed and variable component. Revenue is recognized ratably for these services over the contractual term of the agreement. We began providing technology licensing services to a third party in 2013 pursuant to a three-year arrangement, which was renewed for one year on the same terms except for the up-front component in January 2016. In July 2016, we entered into a separate three-year arrangement with another third party to provide technology services.

Agency commission fees are charged for agency trades executed by us on behalf of third party broker dealers, institutions and other financial institutions. We began providing agency execution services in April 2016, and revenue is recognized on a trade date basis based on the trade volume executed. . Revenuesearn revenues on transactions for which we charge explicit commissions or commission equivalents, which include the majority of our institutional client orders, are included within Commissions.orders. Commissions and fees are primarily affected by changes in our equity,equities, fixed income and futures transaction volumes with institutional clients;clients, which vary based on client relationships; changes in commission rates; client experience on the various platforms; level of volume based fees from providing liquidity to other trading venues; and the level of our soft dollar and commission recapture activity.

Client commission fees are charged for client trades executed by us on behalf of third party broker-dealers and other financial institutions. Revenue is recognized on a trade date basis, which is the point at which the performance obligation to the customer is satisfied, based on the trade being executed. In addition, we offer workflow technology and analytics services to select third parties. Revenues are derived from fees generated by matching sell-side and buy-side clients orders, and from analytic products delivered to the clients.


Technology licensing fees are charged for the licensing of our proprietary technology and the provision of related services, including hosting, management and support. These fees include an up-front component and a recurring fee for the relevant terms, which may include both fixed and variable components. Revenue is recognized ratably for these services over the contractual term of the agreement.

Other, Net. In July 2016, we madenet. We have interests in multiple strategic investments and telecommunications joint ventures (“JVs”). We record our pro-rata share of each JV’s earnings or losses within other, net, while fees related to the use of communication services provided by the JVs are recorded within communications and data processing. 

We have a minoritynoncontrolling investment (the “SBI Investment”) in SBI, Japannext Co., Ltd. (“SBI”), a proprietary trading system based in Tokyo, for $38.8 million, which was substantially paid in Japanese Yen.Tokyo. In connection with the investment, we issued bonds to certain affiliates of SBI and used the proceeds of ¥3.5 billion to partially finance the transaction. Revenues or losses are recognized due to the changes in fair value of the investment or fluctuations in Japanese Yen conversion rates in Other, net.

As discussed in Note 2 of Part I Item 1 “Condensed Consolidated Financial Statements (Unaudited)” of this Form 10-Q, we own interests in two JVs and we record our pro-rata share of the JVs earnings or losses within Other, net.


65
Table of Contents
Operating Expenses

Brokerage, Exchange and Clearance Fees, Net.


Brokerage, exchange, and clearance fees and payments for order flow, net. Brokerage, exchange, clearance fees and payments for order flow are generally our most significant expense andexpenses, which include the direct expenses of executing and clearing transactions that we consummate in the course of our market making activities. Brokerage, exchange, and clearance fees includeand payments for order flow primarily consist of fees paid to various prime brokers, exchangescharged by third parties for executing, processing and clearing firms for services such as execution of transactions, prime brokeragesettling trades. These fees access fees and clearing expenses. These expenses generally increase and decrease in direct correlation with the level of our trading activity, or volumes, in the markets we serve.activity. Execution fees are paid primarily to exchanges and venues where we trade. Clearance fees are paid to clearing houses and clearing agents. Payments for order flow represent payments to broker-dealer clients, in the normal course of business, for directing their order flow in U.S. equities to the Company. Rebates based on volume discounts, credits or payments received from exchanges or other market placesmarketplaces are netted against brokerage, exchange, and clearance fees.

Payments for Order Flow. Payments for order flow is a result of the Acquisition of KCG,fees and it primarily represent payments to broker dealer clients, in the normal course of business, for directing to us their order flow primarily in U.S. equities. Payments for order flow will fluctuate as we modify our rates and as our percentage of clients whose policy is not to accept payments for order flow varies. Payments for order flow also fluctuate based on U.S. equity share and option volumes, our profitability and the mix of market orders, limit orders, and customer mix.

flow.


Communication and Data Processing. data processing.Communication and data processing represent primarily fixed expenses for leased equipment, equipment co-location, network lines and connectivity for our trading centers and co-location facilities. More specifically, communicationsCommunications expense consists primarily of the cost of voice and data telecommunication lines supporting our business, including connectivity to data centers, and exchanges, markets and liquidity pools around the world, and data processing expense consists primarily of market data subscription fees that we pay to third parties to receive price quotes and related information.


Employee Compensationcompensation and Payroll Taxes. payroll taxes.Employee compensation and payroll taxes include employee salaries, cash and non-cash incentive compensation, employee benefits, payroll taxes, severance and other employee related costs. Employee compensation expense for the interim period is accrued in connection with the Adjusted Net Trading Income for the period with certain adjustments made at management’s discretion. Non-cash compensation includes, prior to the Reorganization Transactions, the share based-incentive compensation paid to employees in the form of Class A-2 profits interests in Employee Holdco, which formerly held corresponding Class A-2 profits interests in

52

Table of Contents

Virtu Financial.  Additionally, after the Reorganization Transactions, itand payroll taxes also includes non-cash compensation expenses with respect to therestricted stock optionsunits and restricted stock unitsawards granted in connection with and subsequent to the IPO pursuant to the Amended and Restated 2015 Management Incentive Plan. We have capitalizedPlan and therefore excluded employee compensationClass A Common Stock underlying certain awards assumed pursuant to the Amended and benefits related to software development of $1.8 million and $2.5 million for the three months ended September 30, 2017 and 2016, respectively and $4.5 million and $8.0 million for the nine months ended September 30, 2017 and 2016, respectively.

Restated ITG 2007 Equity Plan.


Interest and Dividends Expense. dividends expense.We incur interest expense from loaning certain equity securities in the general course of our market making activities pursuant to collateralized lending transactions. Typically, dividend expense is incurred when a dividend is paid on securities sold short.


Operations and Administrative. administrative.Operations and administrative expense represents occupancy, recruiting, travel and related expense, professional fees and other expenses.


Depreciation and Amortization. amortization.Depreciation and amortization expense results from the depreciation of fixed assets, such as computing and communications hardware, as well as amortization of leasehold improvements and capitalized in-house software development. We depreciate our computer hardware and related software, office hardware and furniture and fixtures on a straight-line basis over a period of 3 to 7 years based on the estimated useful life of the underlying asset, and we amortize our capitalized software development costs on a straight-line basis over a period of 1.41.5 to 3.03 years, which represents the estimated useful lives of the underlying software. We amortize leasehold improvements on a straight-line basis over the lesser of the life of the improvement or the term of the lease.


Amortization of Purchased Intangiblespurchased intangibles and Acquired Capitalized Software. acquired capitalized software.Amortization of purchased intangibles and acquired capitalized software represents the amortization of $1.9 million, $2.0 million and $156.3 million offinite lived intangible assets acquired in connection with the acquisitionsacquisition of certain assets from Nyenburgh Holding B.V., Teza Technologies, the Acquisition of KCG, and KCG, respectively.the ITG Acquisition. These assets are amortized over their useful lives, ranging from 1.41 to 1715 years, except for certain assets which were categorized as having indefinite useful live.

lives.


Termination of office leases. Termination of office leases represents the write-off expense related to certain office space we ceased use of as part of the effort to integrate and consolidate office space in connection with the Acquisition of KCG and the ITG Acquisition. The aggregate write-off amount includes the impairment of operating lease right-of-use assets, leasehold improvements and fixed assets, and dilapidation charges.

Debt Issue Costs Relatedissue costs related to Debt Refinancing. The financingdebt refinancing, prepayment and commitment fees. As a result of the refinancing or early termination of our long-term borrowings, has resulted in, and may inwe accelerate the future result in the acceleration ofcapitalized debt issue costs incurred at issuance and originally scheduled tothe discount on the term loan that would otherwise be amortized or accreted over the life of the term loan.

Premium paid in connection with retiring outstanding bonds, and commitment fees paid for lines of credit are also included in this category.


Transaction Advisory Feesadvisory fees and Expenses.expenses.  Transaction advisory fees and expenses primarily reflect professional fees incurred by the Companyus in connection with the ITG Acquisition of KCG.

Reserve for Legal Matter. In December 2015 the enforcement committee of the Autorité des marchés financiers (“AMF”) fined the Company’s European subsidiary in the amount of €5.0 million (approximately $5.4 million) based on its allegations that the subsidiary of MTH engaged in price manipulation and violations of the AMF General Regulation and Euronext Market Rules.  In accordance with the foregoing, the Company accrued an estimated loss of €5.0 million (approximately $5.4 million) in relation to the fine imposed by the AMF. The Company’s management believes that the relevant trading engaged in by the subsidiary of MTH was conducted in accordance with applicable French law and regulations and the Company is pursuing its rights of appeal. In May 2017, the fine was reduced to €3.0 million (approximately $3.5 million), subject to an incremental charge of €0.3 million and accordingly the Company has accrued €3.3 million (approximately $3.9 million), which has been recorded under operations and administrative expense in the condensed consolidated statement of comprehensive income (loss), and the Company continues to pursue its rights to appeal.  Additionally, prior to the Acquisition, a subsidiary of KCG was fined €0.4 million (approximately $0.5 million) by the AMF’s enforcement committee. This amount was recorded as a reserve by KCG and was included as a liability as of the Closing Date as this fine has not yet been invoiced or paid. Subject to the foregoing, based on information currently available, at present management believes it is not probable that the resolution of any known matters will result in a material adverse effect on the Company’s financial position, although they might be material for the Company’s results of operations or cash  flows for any particular reporting period.

Charges Related to Share Based Compensation at IPO. At the consummation of the IPO and through the period ended September 30, 2017, we recognized non-cash compensation expenses in respect of the outstanding time

2019.

53


66
Table of Contents

vested Class B and East MIP Class B interests, net of capitalization and amortization of costs incurred attributable to employees engaged in development of software for internal use, as discussed in Note 15 to the notes to the condensed consolidated financial statements.

Financing Interest Expenseinterest expense on Long-Term Borrowings. long-term borrowings.Financing interest expense reflects interest accrued on outstanding indebtedness under our long-term borrowing arrangements.


Provision for (Benefit(benefit from) Income Taxes

Prior to the consummation of the Reorganization Transactions and the IPO, our business was historically operated through a limited liability company that is treated as a partnership for U.S. federal income tax purposes, and as such most of our income was not subject to U.S. federal and certain state income taxes. Our income tax expense for historical periods reflects taxes payable by certain of our non-U.S. subsidiaries. Subsequent to consummation of the Reorganization Transactions and the IPO, we


We are subject to U.S. federal, state and local income tax at the rate applicable to corporations less the rate attributable to the noncontrolling interest in Virtu Financial.


Our effective tax rate is subject to significant variation due to several factors, including variability in our pre-tax and taxable income and loss and the jurisdictions to which they relate, changes in how we do business, acquisitions and investments, audit-related developments, tax law developments (including changes in statutes, regulations, case law, and administrative practices), and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.

We regularly assess whether it is more likely than not that we will realize our deferred tax assets in each taxing jurisdiction in which we operate. In performing this assessment with respect to each jurisdiction, we review all available evidence, including actual and expected future earnings, capital gains, and investment in such jurisdiction, the carry-forward periods available to us for tax reporting purposes, and other relevant factors. See Note 14 “Income Taxes” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for additional information.

67
Table of Contents
Non-GAAP Financial Measures and Other Items


To supplement our unaudited condensed consolidated financial statements presented in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), we use the following non-GAAPnon-U.S. GAAP (“Non-GAAP”) financial measures of financial performance:

·

“Adjusted Net Trading Income”, which is the amount of revenue we generate from our market making activities, or trading income, net, plus commissions, net and technology services, interest and dividends income and expense, net, less direct costs associated with those revenues, including brokerage, exchange and clearance fees, net. Management believes that this measurement is useful for comparing general operating performance from period to period. Although we use Adjusted Net Trading Income as a financial measure to assess the performance of our business, the use of Adjusted Net Trading Income is limited because it does not include certain material costs that are necessary to operate our business. Our presentation of Adjusted Net Trading Income should not be construed as an indication that our future results will be unaffected by revenues or expenses that are not directly associated with our market making activities.

·

“EBITDA”, which measures our operating performance by adjusting net income to exclude financing interest expense on long-term borrowings, depreciation and amortization, amortization of purchased intangibles and acquired capitalized software and income tax expense, and “Adjusted EBITDA”, which measures our operating performance by further adjusting EBITDA to exclude severance, transaction advisory fees and expenses, termination of office leases, equipment write-off, share based compensation charges related to share based compensation at IPO, the 2015 Management Incentive Plan, and charges related to share based compensation at IPO.


·

“Normalized Adjusted Net Income”, “Normalized Adjusted Net Income before income taxes”, “Normalized provision for income taxes”, and “Normalized Adjusted EPS”, which we calculate by adjusting Net Income to exclude certain items including IPO-related adjustments and other non-cash items, assuming that all vested and unvested Virtu Financial Units have been exchanged for Class A common stock, and applying a corporate tax rate between 35.5% and 37%.

•“Adjusted Net Trading Income”, which is the amount of revenue we generate from our market making activities, or Trading income, net, plus Commissions, net and technology services, plus Interest and dividends income, less direct costs associated with those revenues, including Brokerage, exchange, clearance fees and payments for order flow, net, and Interest and dividends expense. Management believes that this measurement is useful for comparing general operating performance from period to period. Although we use Adjusted Net Trading Income as a financial measure to assess the performance of our business, the use of Adjusted Net Trading Income is limited because it does not include certain material costs that are necessary to operate our business. Our presentation of Adjusted Net Trading Income should not be construed as an indication that our future results will be unaffected by revenues or expenses that are not directly associated with our market making activities.

Total

•“EBITDA”, which measures our operating performance by adjusting net income to exclude Financing interest expense on long-term borrowings, Debt issue cost related to debt refinancing, prepayment, and commitment fees, Depreciation and amortization, Amortization of purchased intangibles and acquired capitalized software, and Income tax expense, and “Adjusted EBITDA”, which measures our operating performance by further adjusting EBITDA to exclude severance, transaction advisory fees and expenses, termination of office leases, charges related to share based compensation and other expenses, which includes reserves for legal matters, COVID-19 one-time costs and donations and Other, net.
•“Normalized Adjusted Net Income”, “Normalized Adjusted Net Income before income taxes”, “Normalized provision for income taxes”, and “Normalized Adjusted EPS”, which we calculate by adjusting Net Income to exclude certain items including IPO-related adjustments and other non-cash items, assuming that all vested and unvested Virtu Financial Units have been exchanged for Class A Common Stock, and applying an effective tax rate, which was approximately 24%.
•Operating Margins, which are calculated by dividing net income, EBITDA, and Adjusted EBITDA by Adjusted Net Trading Income.

Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, and Normalized Adjusted EPS, and Operating Margins (collectively, the “Company's Non-GAAP Measures”) are non-GAAPNon-GAAP financial measures used by management in evaluating operating performance and in making strategic decisions. Additional information provided regarding the breakdown of Totaltotal Adjusted Net Trading Income by category is also a non-GAAPNon-GAAP financial measure but is not used by the Company in evaluating operating performance and in making strategic decisions. In addition, these non-GAAP financial measuresthe Company's Non-GAAP Measures or similar non-GAAPNon-GAAP financial measures are used by research analysts, investment bankers and lenders to assess our operating performance. Management believes that the presentation of Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes and Normalized Adjusted

54

Table of Contents

EPS providethe Company's Non-GAAP Measures provides useful information to investors regarding our results of operations and cash flows because they assist both investors and management in analyzing and benchmarking the performance and value of our business. Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes and Normalized Adjusted EPSThe Company's Non-GAAP Measures provide indicators of general economic performance that are not affected by fluctuations in certain costs or other items. Accordingly, management believes that these measurements are useful for comparing general operating performance from period to period. Furthermore, our senior secured credit facilityCredit Agreement contains covenants and other tests based on metrics similar to Adjusted EBITDA. Other companies may define Adjusted Net Trading Income, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, and Normalized Adjusted EPS, and Operating Margins differently, and as a result our measures of Adjusted Net Trading Income, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes and Normalized Adjusted EPSthe Company's Non-GAAP Measures may not be directly comparable to those of other companies. Although we use these non-GAAP measuresthe Company's Non-GAAP Measures as financial measures to assess the performance of our business, such use is limited because they do not include certain material costs necessary to operate our business.

Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes and Normalized Adjusted EPS


The Company's Non-GAAP Measures should be considered in addition to, and not as a substitute for, Net Income in accordance with U.S. GAAP as a measure of performance. Our presentation of Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes and Normalized Adjusted EPSthe Company's Non-GAAP Measures should not be construed as an indication that our future results will be unaffected by unusual or nonrecurring items. Adjusted Net Trading Income, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes and Normalized Adjusted EPS and our EBITDA-based measuresThe Company's Non-GAAP Measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

·

they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments;

·

our EBITDA-based measures do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payment on our debt;


·

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and our EBITDA-based measures do not reflect any cash requirement for such replacements or improvements;

•they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments;

·

they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;

68
Table of Contents

·

they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; and

•our EBITDA-based measures do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payment on our debt;

·

they do not reflect limitations on our costs related to transferring earnings from our subsidiaries to us.

•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and our EBITDA-based measures do not reflect any cash requirement for such replacements or improvements;

•they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;
•they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; and
•they do not reflect limitations on our costs related to transferring earnings from our subsidiaries to us.

Because of these limitations, Adjusted Net Trading Income, EBITDA, Adjusted EBITDA and Normalized Adjusted Net Incomethe Company's Non-GAAP Measures are not intended as alternatives to Net Income as indicators of our operating performance and should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations. We compensate for these limitations by using Adjusted Net Trading Income, EBITDA, Adjusted EBITDA and Normalized Adjusted Net Incomethe Company's Non-GAAP Measures along with other comparative tools, together with U.S. GAAP measurements, to assist in the evaluation of operating performance. These U.S. GAAP measurements include operating Net Income, (loss), cash flows from operations and cash flow data. See below a reconciliation of each non-GAAP financial measureof the Company's Non-GAAP Measures to the most directly comparable U.S. GAAP measure.

55


Table of Contents

The following tables reconcile condensed consolidated statementstable reconciles the Condensed Consolidated Statements of comprehensive income (loss)Comprehensive Income to arrive at EBITDA, Adjusted EBITDA, Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, and selected Operating Margins.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

    

September 30, 

 

 

September 30, 

 

 

 

 

2017

    

2016

    

 

2017

    

2016

 

 

Reconciliation of Trading income, net to Adjusted Net Trading Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

203,907

 

$

156,706

 

 

$

479,644

 

$

509,542

 

 

Interest and dividends income

 

 

20,430

 

 

5,271

 

 

 

30,933

 

 

14,961

 

 

Commissions, net and technology services

 

 

43,351

 

 

2,931

 

 

 

49,237

 

 

7,224

 

 

Brokerage, exchange and clearance fees, net

 

 

(64,584)

 

 

(52,118)

 

 

 

(170,253)

 

 

(167,416)

 

 

Payments for order flow

 

 

(12,071)

 

 

 —

 

 

 

(12,071)

 

 

 —

 

 

Interest and dividends expense

 

 

(31,242)

 

 

(15,615)

 

 

 

(58,456)

 

 

(43,249)

 

 

Adjusted Net Trading Income

 

$

159,791

 

$

97,175

 

 

$

319,034

 

$

321,062

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Net Income to EBITDA and Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (loss)

 

$

(39,990)

 

$

33,023

 

 

$

(14,503)

 

$

123,665

 

 

Financing interest expense on long-term borrowings

 

 

24,593

 

 

7,393

 

 

 

40,141

 

 

21,569

 

 

Debt issue cost related to debt refinancing

 

 

4,869

 

 

 —

 

 

 

9,351

 

 

 —

 

 

Depreciation and amortization

 

 

15,602

 

 

7,158

 

 

 

29,157

 

 

22,685

 

 

Amortization of purchased intangibles and acquired capitalized software

 

 

6,440

 

 

53

 

 

 

6,546

 

 

159

 

 

Provision (benefit) for Income Taxes

 

 

(6,505)

 

 

4,851

 

 

 

(2,918)

 

 

17,325

 

 

EBITDA

 

$

5,009

 

$

52,478

 

 

$

67,774

 

$

185,403

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance

 

 

9,295

 

 

77

 

 

 

10,172

 

 

270

 

 

Reserve for legal matter

 

 

 —

 

 

 —

 

 

 

(2,176)

 

 

 —

 

 

Transaction advisory fees and expenses

 

 

15,677

 

 

521

 

 

 

24,188

 

 

676

 

 

Termination of office leases

 

 

1,811

 

 

 —

 

 

 

1,811

 

 

(319)

 

 

Acquisition related retention bonus

 

 

23,050

 

 

 —

 

 

 

23,050

 

 

 —

 

 

Trading related settlement income

 

 

 —

 

 

(2,975)

 

 

 

 —

 

 

(2,975)

 

 

Other, net

 

 

(300)

 

 

102

 

 

 

(289)

 

 

102

 

 

Equipment write-off

 

 

544

 

 

 —

 

 

 

544

 

 

428

 

 

Share based compensation

 

 

2,270

 

 

4,892

 

 

 

17,102

 

 

14,587

 

 

Charges related to share based compensation at IPO, 2015 Management Incentive Plan

 

 

1,336

 

 

1,512

 

 

 

4,134

 

 

4,212

 

 

Charges related to share based compensation awards at IPO

 

 

181

 

 

333

 

 

 

545

 

 

1,444

 

 

Adjusted EBITDA

 

$

58,873

 

$

56,940

 

 

$

146,855

 

$

203,828

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Operating Margins

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Margin (1)

 

 

(25.0)

%  

 

34.0

%  

 

 

(4.5)

%  

 

38.5

%

 

EBITDA Margin (2)

 

 

3.1

%  

 

54.0

%  

 

 

21.2

%  

 

57.7

%

 

Adjusted EBITDA Margin (3)

 

 

36.8

%  

 

58.6

%  

 

 

46.0

%  

 

63.5

%

 

Margins for the three and nine months ended September 30, 2020 and 2019.

(1)

Calculated by dividing net income by Adjusted Net Trading Income.

Three Months Ended September 30,Nine Months Ended
September 30,
(in thousands)2020201920202019
Reconciliation of Trading income, net to Adjusted Net Trading Income
Trading income, net$441,295 $220,148 $1,987,756 $683,611 
Interest and dividends income10,932 23,352 46,788 76,645 
Commissions, net and technology services133,853 139,627 452,333 359,894 
Brokerage, exchange, clearance fees and payments for order flow, net(196,448)(98,789)(573,769)(285,890)
Interest and dividends expense(27,374)(34,546)(97,656)(116,739)
Adjusted Net Trading Income$362,258 $249,792 $1,815,452 $717,521 
Reconciliation of Net Income to EBITDA and Adjusted EBITDA
Net income (loss)$199,708 $(5,184)$923,228 $(74,288)
Financing interest expense on long-term borrowings20,358 34,191 67,764 91,669 
Debt issue cost related to debt refinancing, prepayment, and commitment fees9,916 — 27,282 7,894 
Depreciation and amortization16,656 17,598 50,728 48,859 
Amortization of purchased intangibles and acquired capitalized software18,265 18,908 56,177 50,436 
Provision for (benefit from) income taxes52,807 (644)200,044 (14,322)
EBITDA$317,710 $64,869 $1,325,223 $110,248 
Severance3,030 13,403 7,192 74,627 
Transaction advisory fees and expenses2,463 7,163 2,737 24,074 
Termination of office leases60 1,278 343 66,490 
Gain on sale of MATCHNow(58,652)— (58,652)— 
Other(11,138)787 (10,157)2,278 
Share based compensation(4,740)16,374 37,510 39,564 
Adjusted EBITDA$248,733 $103,874 $1,304,196 $317,281 
Selected Operating Margins
Net Income Margin (1)55.1 %(2.1)%50.9 %(10.4)%
EBITDA Margin (2)87.7 %26.0 %73.0 %15.4 %
Adjusted EBITDA Margin (3)68.7 %41.6 %71.8 %44.2 %

(2)

Calculated by dividing EBITDA by Adjusted Net Trading Income.

(1)Calculated by dividing net income by Adjusted Net Trading Income.

(3)

Calculated by dividing Adjusted EBITDA by Adjusted Net Trading Income.

56

(2)Calculated by dividing EBITDA by Adjusted Net Trading Income.

69
Table of Contents

(3)Calculated by dividing Adjusted EBITDA by Adjusted Net Trading Income.


The following tables reconciletable reconciles Net Income to arrive at Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted Net Income and Normalized Adjusted EPS.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

   

2017

   

2016

   

   

2017

   

2016

   

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Net Income to Normalized Adjusted Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(39,990)

 

$

33,023

 

 

$

(14,503)

 

$

123,665

 

Provision for (benefit from) income taxes

 

 

(6,505)

 

 

4,851

 

 

 

(2,918)

 

 

17,325

 

Income (loss) before income taxes

 

 

(46,495)

 

 

37,874

 

 

 

(17,421)

 

 

140,990

 

Amortization of purchased intangibles and acquired capitalized software

 

 

6,440

 

 

53

 

 

 

6,546

 

 

159

 

Financing interest expense related to KCG transaction

 

 

3,010

 

 

 —

 

 

 

4,626

 

 

 —

 

Debt issue cost related to debt refinancing

 

 

4,869

 

 

 —

 

 

 

9,351

 

 

 —

 

Severance

 

 

9,295

 

 

77

 

 

 

10,172

 

 

270

 

Reserve for legal matter

 

 

 —

 

 

 —

 

 

 

(2,176)

 

 

 —

 

Transaction advisory fees and expenses

 

 

15,677

 

 

521

 

 

 

24,188

 

 

676

 

Termination of office leases

 

 

1,811

 

 

 —

 

 

 

1,811

 

 

(319)

 

Equipment write-off

 

 

1,075

 

 

 —

 

 

 

2,177

 

 

428

 

Acquisition related retention bonus

 

 

23,050

 

 

 —

 

 

 

23,050

 

 

 —

 

Trading related settlement income

 

 

 —

 

 

(2,975)

 

 

 

 —

 

 

(2,975)

 

Other, net

 

 

(300)

 

 

102

 

 

 

(289)

 

 

102

 

Share based compensation

 

 

2,270

 

 

4,892

 

 

 

17,102

 

 

14,587

 

Charges related to share based compensation at IPO, 2015 Management Incentive Plan

 

 

1,336

 

 

1,512

 

 

 

4,134

 

 

4,212

 

Charges related to share based compensation awards at IPO

 

 

181

 

 

333

 

 

 

545

 

 

1,444

 

Normalized Adjusted Net Income before income taxes

 

 

22,219

 

 

42,389

 

 

 

83,816

 

 

159,574

 

Normalized provision for income taxes (1)

 

 

8,221

 

 

15,048

 

 

 

31,012

 

 

56,649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Normalized Adjusted Net Income

 

$

13,998

 

$

27,341

 

 

$

52,804

 

$

102,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Adjusted shares outstanding (2)

 

 

178,490,856

 

 

139,687,848

 

 

 

152,812,060

 

 

139,685,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Normalized Adjusted EPS

 

$

0.08

 

$

0.20

 

 

$

0.35

 

$

0.74

 

EPS for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30,Nine Months Ended
September 30,
(in thousands, except share and per share data)2020201920202019
Reconciliation of Net Income to Normalized Adjusted Net Income
Net income (loss)$199,708 $(5,184)$923,228 $(74,288)
Provision for (benefit from) income taxes52,807 (644)200,044 (14,322)
Income (loss) before income taxes252,515 (5,828)1,123,272 (88,610)
Amortization of purchased intangibles and acquired capitalized software18,265 18,908 56,177 50,436 
Debt issue cost related to debt refinancing, prepayment, and commitment fees9,916 — 27,282 7,894 
Severance3,030 13,403 7,192 74,627 
Transaction advisory fees and expenses2,463 7,163 2,737 24,074 
Termination of office leases60 1,278 343 66,490 
Gain on sale of MATCHNow(58,652)— (58,652)— 
Other(11,138)787 (10,157)2,278 
Share based compensation(4,740)16,374 37,510 39,564 
Normalized Adjusted Net Income before income taxes211,719 52,085 1,185,704 176,753 
Normalized provision for income taxes (1)50,813 12,500 284,569 42,421 
Normalized Adjusted Net Income$160,906 $39,585 $901,135 $134,332 
Weighted Average Adjusted shares outstanding (2)198,097,715 192,618,019 196,736,969 192,959,477 
Normalized Adjusted EPS$0.81 $0.21 $4.58 $0.70 

(1)

Reflects U.S. federal, state, and local income tax rate applicable to corporations of between 35.5% and 37%..

(1)Reflects U.S. federal, state, and local income tax rate applicable to corporations of approximately 24% for 2020 and 24% for 2019.
(2)Assumes that (1) holders of all vested and unvested non-vesting Virtu Financial Units (together with corresponding shares of the Company's Class C common stock, par value $0.00001 per share (the “Class C Common Stock”)) have exercised their right to exchange such Virtu Financial Units for shares of Class A Common Stock on a one-for-one basis, (2) holders of all Virtu Financial Units (together with corresponding shares of the Company's Class D common stock, par value $0.00001 per share (the “Class D Common Stock”)) have exercised their right to exchange such Virtu Financial Units for shares of the Company's Class B common stock, par value $0.00001 per share (the “Class B Common Stock”) on a one-for-one basis, and subsequently exercised their right to convert the shares of Class B Common Stock into shares of Class A Common Stock on a one-for-one basis. Includes additional shares from dilutive impact of options, restricted stock units and restricted stock awards outstanding under the Amended and Restated 2015 Management Incentive Plan and the Amended and Restated ITG 2007 Equity Plan during the three and nine months ended September 30, 2020 and 2019 as well as warrants issued in connection with the Founder Member Loan during the three and nine months ended September 30, 2020.

70
The following tables reconcile Trading income, net to Adjusted Net Trading Income by segment for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30, 2020
(in thousands)Market MakingExecution ServicesCorporateTotal
Trading income, net$441,829 $(534)$— $441,295 
Commissions, net and technology services9,391 124,462 — 133,853 
Interest and dividends income10,763 169 — 10,932 
Brokerage, exchange, clearance fees and payments for order flow, net(177,758)(18,690)— (196,448)
Interest and dividends expense(26,990)(384)— (27,374)
Adjusted Net Trading Income$257,235 $105,023 $— $362,258 
Three Months Ended September 30, 2019
(in thousands)Market MakingExecution ServicesCorporateTotal
Trading income, net$219,535 $613 $— $220,148 
Commissions, net and technology services7,252 132,375 — 139,627 
Interest and dividends income22,617 735 — 23,352 
Brokerage, exchange, clearance fees and payments for order flow, net(73,463)(25,326)— (98,789)
Interest and dividends expense(34,222)(324)— (34,546)
Adjusted Net Trading Income$141,719 $108,073 $— $249,792 

Nine Months Ended September 30, 2020
(in thousands)Market MakingExecution ServicesCorporateTotal
Trading income, net$1,989,176 $(1,420)$— $1,987,756 
Commissions, net and technology services9,526 442,807 — 452,333 
Interest and dividends income46,216 572 — 46,788 
Brokerage, exchange, clearance fees and payments for order flow, net(487,234)(86,535)— (573,769)
Interest and dividends expense(96,062)(1,594)— (97,656)
Adjusted Net Trading Income$1,461,622 $353,830 $— $1,815,452 

Nine Months Ended September 30, 2019
(in thousands)Market MakingExecution ServicesCorporateTotal
Trading income, net$680,224 $3,387 $— $683,611 
Commissions, net and technology services17,213 342,681 — 359,894 
Interest and dividends income64,404 12,241 — 76,645 
Brokerage, exchange, clearance fees and payments for order flow, net(203,660)(82,230)— (285,890)
Interest and dividends expense(104,877)(11,862)— (116,739)
Adjusted Net Trading Income$453,304 $264,217 $— $717,521 

(2)

Assumes that (1) holders of all vested and unvested Virtu Financial Units (together with corresponding shares of Class C common stock), have exercised their right to exchange such Virtu Financial Units for shares of Class A common stock on a one-for-one basis, (2) holders of all Virtu Financial Units (together with corresponding shares of Class D common stock), have exercised their right to exchange such Virtu Financial Units for shares of Class B common stock on a one-for-one basis, and subsequently exercised their right to convert the shares of Class B common stock into shares of Class A common stock on a one-for-one basis. Includes additional shares from dilutive impact of options and restricted stock units outstanding under the 2015 Management Incentive Plan during the three and nine months ended September 30, 2017 and 2016.

71

The following tables reconcile our Market Making segment Trading income, net to Adjusted Net Trading Income by category for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30, 2020
(in thousands)Global EquitiesGlobal FICC, Options and OtherUnallocatedTotal Market Making
Trading income, net$385,594 $56,235 $— $441,829 
Commissions, net and technology services9,391 — — 9,391 
Brokerage, exchange, clearance fees and payments for order flow, net(169,279)(8,479)— (177,758)
Interest and dividends, net(14,114)(2,113)— (16,227)
Adjusted Net Trading Income$211,592 $45,643 $— $257,235 

Three Months Ended September 30, 2019
(in thousands)Global EquitiesGlobal FICC, Options and OtherUnallocatedTotal Market Making
Trading income, net$166,031 $52,126 $1,378 $219,535 
Commissions, net and technology services7,252 — — 7,252 
Brokerage, exchange, clearance fees and payments for order flow, net(61,903)(10,024)(1,536)(73,463)
Interest and dividends, net(8,889)(2,754)38 (11,605)
Adjusted Net Trading Income$102,491 $39,348 $(120)$141,719 

Nine Months Ended September 30, 2020
(in thousands)Global EquitiesGlobal FICC, Options and OtherUnallocatedTotal Market Making
Trading income, net$1,754,309 $234,867 $— $1,989,176 
Commissions, net and technology services9,526 — — 9,526 
Brokerage, exchange, clearance fees and payments for order flow, net(462,201)(25,033)— (487,234)
Interest and dividends, net(44,264)(5,582)— (49,846)
Adjusted Net Trading Income$1,257,370 $204,252 $— $1,461,622 

Nine Months Ended September 30, 2019
(in thousands)Global EquitiesGlobal FICC, Options and OtherUnallocatedTotal Market Making
Trading income, net$537,708 $143,042 $(526)$680,224 
Commissions, net and technology services17,241 (28)— 17,213 
Brokerage, exchange, clearance fees and payments for order flow, net(173,494)(30,736)570 (203,660)
Interest and dividends, net(31,816)(8,497)(160)(40,473)
Adjusted Net Trading Income$349,639 $103,781 $(116)$453,304 
72
The following table shows our Trading Income, Net, average daily Trading Income, Net, Adjusted Net Trading Income, average daily Adjusted Net Trading Income and percentage of Adjusted Net Trading Income by asset class for the three and nine months ended September 30, 20172020 and 2016.

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

Three Months Ended September 30,

 

Adjusted Net Trading Income by Category:

 

 

2017

 

 

2016

 

% Change

 

Market Making:

 

 

 

 

 

 

 

 

 

 

Americas Equities

 

$

82,588

 

$

24,737

 

233.9

%

 

ROW Equities

 

 

16,995

 

 

20,790

 

(18.3)

%

 

Global FICC, Options and Other

 

 

32,204

 

 

45,327

 

(29.0)

%

 

Unallocated (1)

 

 

242

 

 

3,390

 

NM

 

 

Total market making

 

$

132,029

 

$

94,244

 

40.1

%

 

 

 

 

 

 

 

 

 

 

 

 

Execution Services

 

 

28,229

 

 

2,931

 

863.1

%

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

(467)

 

 

 -

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Trading Income

 

$

159,791

 

$

97,175

 

64.4

%

 

2019:

57


Three Months Ended September 30,
Adjusted Net Trading Income by Category:20202019% Change
Market Making:
Global Equities$211,592 $102,491 106.4%
Global FICC, Options and Other45,643 39,348 16.0%
Unallocated(1)— (120)NM
Total Market Making257,235 141,719 81.5%
Execution Services105,023 108,073 (2.8)%
Adjusted Net Trading Income$362,258 $249,792 45.0%
Three Months Ended September 30,
Average Daily Adjusted Net Trading Income by Category:20202019% Change
Market Making:
Global Equities$3,306 $1,601 106.5%
Global FICC, Options and Other713 615 16.0%
Unallocated(1)— (2)NM
Total Market Making4,019 2,214 81.5%
Execution Services1,641 1,689 (2.8)%
Average Daily Adjusted Net Trading Income$5,660 $3,903 45.0%
Nine Months Ended September 30,
Adjusted Net Trading Income by Category:20202019% Change
Market Making:
Global Equities$1,257,370 $349,639 259.6%
Global FICC, Options and Other204,252 103,781 96.8%
Unallocated(1)— (116)NM
Total Market Making1,461,622 453,304 222.4%
Execution Services353,830 264,217 33.9%
Adjusted Net Trading Income$1,815,452 $717,521 153.0%
Nine Months Ended September 30,
Average Daily Adjusted Net Trading Income by Category:20202019% Change
Market Making:
Global Equities$6,653 $1,850 259.6%
Global FICC, Options and Other1,081 549 96.8%
Unallocated(1)— (1)NM
Total Market Making7,733 2,398 222.5%
Execution Services1,872 1,398 33.9%
Average Daily Adjusted Net Trading Income$9,606 $3,796 153.0%
(1)Under our methodology for recording “trading income, net” in our Condensed Consolidated Statements of Comprehensive Income from Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q, we recognize revenues based on the exit price of assets and liabilities in accordance with applicable U.S. GAAP rules, and when we calculate Adjusted Net Trading Income for corresponding reporting periods, we start with trading income, net, so calculated. By contrast, when we calculate Adjusted Net Trading Income by category, we do so

73

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

Three Months Ended September 30,

 

Average Daily Adjusted Net Trading Income by Category:

 

 

2017

 

 

2016

 

% Change

 

Market Making:

 

 

 

 

 

 

 

 

 

 

Americas Equities

 

$

1,311

 

$

387

 

239.1

%

 

ROW Equities

 

 

270

 

 

325

 

(17.0)

%

 

Global FICC, Options and Other

 

 

511

 

 

708

 

(27.8)

%

 

Unallocated (1)

 

 

 4

 

 

53

 

NM

 

 

Total market making

 

$

2,096

 

$

1,473

 

42.3

%

 

 

 

 

 

 

 

 

 

 

 

 

Execution Services

 

 

448

 

 

46

 

878.4

%

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

(7)

 

 

 -

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Trading Income

 

$

2,536

 

$

1,518

 

67.0

%

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

Nine Months Ended September 30,

 

Adjusted Net Trading Income by Category:

 

 

2017

 

 

2016

 

% Change

 

Market Making:

 

 

 

 

 

 

 

 

 

 

Americas Equities

 

$

134,590

 

$

92,837

 

45.0

%

 

ROW Equities

 

 

57,443

 

 

73,536

 

(21.9)

%

 

Global FICC, Options and Other

 

 

97,145

 

 

151,319

 

(35.8)

%

 

Unallocated (1)

 

 

(3,794)

 

 

(3,854)

 

NM

 

 

Total market making

 

$

285,384

 

$

313,838

 

(9.1)

%

 

 

 

 

 

 

 

 

 

 

 

 

Execution Services

 

 

34,117

 

 

7,224

 

372.3

%

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

(467)

 

 

 -

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Trading Income

 

$

319,034

 

$

321,062

 

(0.6)

%

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

Nine Months Ended September 30,

 

Average Daily Adjusted Net Trading Income by Category:

 

 

2017

 

 

2016

 

% Change

 

Market Making:

 

 

 

 

 

 

 

 

 

 

Americas Equities

 

$

716

 

$

491

 

45.7

%

 

ROW Equities

 

 

306

 

 

389

 

(21.5)

%

 

Global FICC, Options and Other

 

 

517

 

 

801

 

(35.5)

%

 

Unallocated (1)

 

 

(20)

 

 

(20)

 

NM

 

 

Total market making

 

$

1,518

 

$

1,661

 

(8.6)

%

 

 

 

 

 

 

 

 

 

 

 

 

Execution Services

 

 

181

 

 

38

 

374.8

%

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

(2)

 

 

 -

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Trading Income

 

$

1,697

 

$

1,699

 

(0.1)

%

 

on a daily basis, and as a result prices used in recognizing revenues may differ. Because we provide liquidity on a global basis, across asset classes and time zones, the timing of any particular Adjusted Net Trading Income calculation may defer or accelerate the amount in a particular category from one day to another, and, at the end of a reporting period, from one reporting period to another. The purpose of the Unallocated category is to ensure that Adjusted Net Trading Income by category sums to total Adjusted Net Trading Income, which can be reconciled to Trading Income, net, calculated in accordance with U.S. GAAP. We do not allocate any resulting differences based on the timing of revenue recognition.

(1)

Under our methodology for recording “trading income, net” in our condensed consolidated statements of comprehensive income (loss), we recognize revenues based on the exit price of assets and liabilities in accordance with applicable U.S. GAAP rules, and when we calculate Adjusted Net Trading Income for corresponding reporting periods, we start with trading income, net, so calculated. By contrast, when we calculate Adjusted Net Trading Income by asset class, we do so on a daily basis, and as a result prices used in recognizing revenues may differ. Because we provide liquidity on a global basis, across asset classes and time zones, the timing of any particular Adjusted Net Trading Income calculation can defer or accelerate the amount in a particular asset class from one day to another, and, at the end of a reporting period, from one reporting period to another. The purpose of the Unallocated category is to ensure that ANTI by category sums to total Adjusted Net Trading Income, which can be reconciled to Trading Income, Net, calculated in accordance with GAAP. We do not allocate any resulting differences based on the timing of revenue recognition.

58

Table of Contents

Three Months Ended September 30, 20172020 Compared to Three Months Ended September 30, 2016

2019


Total Revenues


Our total revenues increased $106.5$273.8 million, or 64.6%71.6%, to $271.3$656.1 million for the three months ended September 30, 2017,2020, compared to $164.8$382.3 million for the three months ended September 30, 2016. This2019. The increase was primarily attributable to the Acquisitiondriven by an increase of KCG.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30,

 

(in thousands, except for percentage)

 

 

2017

 

 

2016

 

 

% Change

 

Market Making

 

 

 

 

 

 

 

 

 

 

Trading revenues, net

 

$

206,542

 

$

156,706

 

 

31.8%

 

Interest and dividends income

 

 

20,056

 

 

5,271

 

 

280.5%

 

Commissions, net and technology services

 

 

1,563

 

 

 -

 

 

NM

 

Other, net

 

 

421

 

 

 -

 

 

NM

 

Total revenues from Market Making

 

$

228,582

 

$

161,977

 

 

41.1%

 

 

 

 

 

 

 

 

 

 

 

 

Execution Services

 

 

 

 

 

 

 

 

 

 

Trading revenues, net

 

$

(3,342)

 

$

 -

 

 

NM

 

Interest and dividends income

 

 

104

 

 

 -

 

 

NM

 

Commissions, net and technology services

 

 

41,788

 

 

2,931

 

 

1325.7%

 

Other, net

 

 

527

 

 

 -

 

 

NM

 

Total revenues from Execution Services

 

$

39,077

 

$

2,931

 

 

1233.2%

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

 

 

 

Trading revenues, net

 

$

707

 

$

 -

 

 

NM

 

Interest and dividends income

 

 

270

 

 

 -

 

 

NM

 

Commissions, net and technology services

 

 

 -

 

 

 -

 

 

NM

 

Other, net

 

 

2,650

 

 

(102)

 

 

NM

 

Total revenues from Corporate

 

$

3,627

 

$

(102)

 

 

NM

 

Trading Income, Net. $221.1 million in Trading income, net, which was driven by higher market volatility and trading volumes from the continued impacts of the COVID-19 pandemic during the three months ended September 30, 2020 compared to the prior period. There was a significant increase in Other, net of $70.8 million, which was primarily relateddue to the gain on the sale of MATCHNow. On August 4, 2020, we completed the sale of MATCHNow to Cboe Global Markets, Inc.("CBOE") for total gross proceeds of $60.6 million in cash and recognized a gain on sale of $58.7 million, which is recorded in Other, net (see Note 4 "Sale of MATCHNow" of Part I Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q).


The following table shows total revenues by segment for the three months ended September 30, 2020 and 2019.
Three Months Ended September 30,
(in thousands, except for percentage)20202019% Change
Market Making
Trading income, net$441,829 $219,535 101.3%
Interest and dividends income10,763 22,617 (52.4)%
Commissions, net and technology services9,391 7,252 29.5%
Other, net12,615 398 3,069.6%
Total revenues from Market Making474,598 249,802 90.0%
Execution Services
Trading income, net(534)613 NM
Interest and dividends income169 735 (77.0)%
Commissions, net and technology services124,462 132,375 (6.0)%
Other, net58,583 82 71,342.7%
Total revenues from Execution Services182,680 133,805 36.5%
Corporate
Other, net(1,166)(1,267)(8.0)
Total revenues from Corporate(1,166)(1,267)(8.0)
Consolidated
Trading income, net441,295 220,148 100.5%
Interest and dividends income10,932 23,352 (53.2)%
Commissions, net and technology services133,853 139,627 (4.1)%
Other, net70,032 (787)NM
Total revenues$656,112 $382,340 71.6%

Trading income, net. Trading income, net was primarily earned by our Market Making segment. Trading income, net increased $47.2$221.1 million, or 30.1%100.5%, to $203.9$441.3 million for the three months ended September 30, 2017,2020, compared to $156.7$220.1 million for the three months ended September 30, 2016.2019. The increase was primarily attributabledriven by the higher market volatility and trading volumes across global markets and major asset categories during the three months ended September 30, 2020 compared to the Acquisitionsame period in 2019. Average daily realized volatility of KCG, offset by the effect of decreased market volume and volatility across major asset categories.S&P 500 Index increased 14.7% during the period as compared to the prior period, while average daily U.S. equity consolidated volumes increased 43.5%. Rather than analyzing trading income, net, in isolation, we generally evaluate it in the broader context of our Adjusted Net Trading Income, together with interest
74

Interest and dividends income, interestInterest and dividends expense, Commissions, net and brokerage,technology services and Brokerage, exchange, and clearance fees and payments for order flow, net, each of which areis described below.


Interest and Dividends Income.dividends income. Interest and dividends income which hiswas primarily recorded inearned by our Market Making segment, increased $15.1segment. Interest and dividends income decreased $12.4 million, or 284.9%53.2%, to $20.4$10.9 million for the three months ended September 30, 2017,2020, compared to $5.3$23.4 million for the three months ended September 30, 2016.2019. This increasedecrease was primarily attributable to the Acquisition of KCG and higherlower interest income earned on cash collateral posted as part of securities borrowing transactions driven by lower interest rates as well as a slight reduction in balances compared to the securities borrowed transactions.same period in 2019. As indicated above, rather than analyzing interest and dividends income in isolation, we generally evaluate it in the broader context of our Adjusted Net Trading Income.


Commissions, net and Technology Services.technology services. Commissions, net and technology services revenues arewere primarily earned by our Execution Services segment. Such revenues include technology licensing fees and agency commission fees, Commissions, net and technology services increased $40.5revenues decreased $5.8 million, or 1,396.6%4.1%, to $43.4$133.9 million for the three months ended September 30, 2017,2020, compared to $2.9$139.6 million for the three months ended September 30, 2016.2019. The increasedecrease was primarily attributable to a reduction in commissions associated with the Acquisition of KCG,previously registered U.S. broker dealer, Virtu Alternet Securities, whose SEC registration was withdrawn in August 2020, as well as agency feethe loss of revenues arising from new customers we onboarded.

associated with MATCHNow, which was sold to CBOE on August 4, 2020.


Other, net. Other, net revenue is primarily recorded in our Corporate segment. Other, net was $3.6$70.0 million for the three months ended September 30, 2017 as2020, compared to a loss of $0.1$(0.8) million for the three months ended September 30, 2016.2019. The increase in revenue recorded in Other, net was primarily due to a result of the Acquisition of KCG, which recorded revenue related to our microwave JV. Other, net also include revenue or loss incurred as a result of the foreign

59

Table of Contents

currency revaluations$58.7 million gain recognized on the Japanese Yen basedsale of MATCHNow, as discussed in Note 4 "Sale of MATCHNow" of Part I Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q. In addition, we recognized a $12.3 million gain on the minority investment in SBI Japannext (see Note 11 "Financial Assets and Liabilities" of Part I Item I "Financial Statements" of this Quarterly Report on Form 10-Q for details on the SBI Bonds, which were $(0.3) million and $0.3 million, respectively, for the three months ended September 30, 2017. There were no such revenue or losses for the three months ended September 30, 2016.

Investment).


Adjusted Net Trading Income


Adjusted Net Trading Income increased $62.6$112.5 million, or 45.0%, to $159.8$362.3 million for the three months ended September 30, 2017,2020, compared to $97.2$249.8 million for the three months ended September 30, 2016.2019. This increasedincrease was primarily attributable to higher Trading income, net in the Market Making segment driven by higher market volatility and trading volumes across major asset categories during the three months ended September 30, 2019 compared to the priorsame period reflects increase (decrease) in Adjusted Net Trading Income in2019. In the following categories: $57.9Market Making segment, Global Equities increased by $109.1 million, from Americas Equities, $(3.8) million from Rest of World (“ROW”) equities or 106.4%, $(13.1) million fromand Global FICC, Options and Other and $(3.1)increased by $6.3 million, of unallocated.or 16.0%, for the three months ended September 30, 2020. Adjusted Net Trading Income relatedper day increased $1.8 million, or 45.0%, to execution services increased $25.3 million to $28.2$5.7 million for the three months ended September 30, 2017 from $2.92020, compared to $3.9 million for the three months ended September 30, 2016. 

The overall increase in Adjusted Net Trading Income was primarily attributable to the Acquisition of KCG, offset by the effect of less favorable conditions across all asset classes as a result of lower levels of volume and volatility within the equities, currencies, and commodities markets that persisted throughout2019. There were 64 trading days for both the three months ended September 30, 2017.2020 and 2019. Adjusted Net Trading Income per dayis a non-GAAP measure. For a full description of Adjusted Net Trading Income and a reconciliation of Adjusted Net Trading Income to trading income, net, see “Non-GAAP Financial Measures and Other Items” in this Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations”.


Operating Expenses

Our operating expenses increased $1.0$15.4 million, or 4.0%, to $2.5$403.6 million for the three months ended September 30, 2017,2020, compared to $1.5$388.2 million for the three months ended September 30, 2016.2019. The number of trading days for the three months ended September 30, 2017 and 2016 were each 63.

Operating Expenses

Ourincrease in operating expenses is primarily due to an increase in brokerage, exchange, clearance fees and payments for order flow, net driven by higher market volatility and trading volumes partially offset by decreases in employee compensation and payroll taxes and other operating expenses described in more detail below.


Brokerage, exchange, clearance fees and payments for order flow, net. Brokerage exchange, clearance fees and payments for order flow, net, increased $190.9$97.7 million, or 150.4%98.9%, to $317.8$196.4 million for the three months ended September 30, 2017,2020, compared to $126.9$98.8 million for the three months ended September 30, 2016. This increase was primarily due to an increase in expenses as a result of the Acquisition of KCG. Specifically we recorded increases in employee compensation and payroll taxes of $51.5 million, $12.1 million in payments for order flow,  $4.8 million of debt issue cost related to debt refinancing, and $15.7 million of transaction advisory fees and expenses related to the Acquisition of KCG. The increase was also attributable to increases in communication and data processing of $28.1 million, in interest and dividend expense of $15.6 million, in operating and administrative expense of $18.7 million, in financing interest expense on long term borrowings of $17.2 million, in brokerage, exchange, and clearance fees of $12.5 million, in depreciation and amortization expense of $8.4 million. these increases were partially offset by decrease in charges related to share based compensation at IPO of $0.1 million. Amortization of purchased intangibles and acquired capitalized software increased to $6.4 million for the three months ended September 30, 2017 compared to $0.1 million for the three months ended September 30, 2016 as a result of the amortization of intangibles resulting from the Acquisition of KCG.  

Brokerage, Exchange and Clearance Fees, Net. Brokerage exchange and clearance fees, net, increased $12.5 million, or 24.0%, to $64.6 million for the three months ended September 30, 2017, compared to $52.1 million for the three months ended September 30, 2016.2019. This increase was primarily attributable to the increase in payments for order flow as well as an increase in volumes we traded in Global Equities instruments and other asset categories. The increase in payments for order flow was driven by the increases in market volume and volatility tradedvolumes from our broker-dealer clients eligible for payments for order flow, driven by high participation of retail investors in the Americas equities, EMEA equities, APAC equities, Global Commodities, and Global Currencies instruments in which we make markets. As indicated above, rather than analyzing brokerage, exchange and clearance fees, net, in isolation, we generallymarket during the past quarter compared to the prior period. We evaluate itthis category representing direct costs associated with transacting business, in the broader context of our Adjusted Net Trading Income.

Payments for order flow.  Payments for order flow were $12.1


Communication and data processing. Communication and data processing expense decreased $8.1 million, or 13.6%, to $51.6 million for the three months ended September 30, 2017 and were primarily attributable2020, compared to the Acquisition of KCG. There were no payments for order flow for the three months ended September 30, 2016. Payments for order flow primarily represent payments to broker dealer clients, in the normal course of business, for directing to us their order flow primarily in U.S. equities. Payments for order flow also fluctuate based on U.S. equity share and option volumes, our profitability and the mix of market orders, limit orders, and customer mix.

Communication and Data Processing. Communication and data processing expense increased $28.1 million, or 157.0%, to $46.0$59.8 million for the three months ended September 30, 2017, compared2019. This decrease was primarily due to $17.9reductions in connectivity connections as a result of an on-going effort to consolidate various communication and data processing subscriptions.

75


Employee compensation and payroll taxes. Employee compensation and payroll taxes decreased $54.8 million, or 60.5%, to $35.8 million for the three months ended September 30, 2016. This increase was primarily due2020, compared to commencement of new connectivity connections,

60

Table of Contents

as well as increases in market data fees. The increase was partially offset by reductions in discontinued connectivity connections. 

Employee Compensation and Payroll Taxes. Employee compensation and payroll taxes increased $51.5 million, or 247.6%, to $72.3$90.6 million for the three months ended September 30, 2017, compared2019. The decrease in compensation levels was primarily attributable to $20.8a reduction in accrued incentive compensation in the third quarter, which is recorded at management’s discretion and is generally accrued in connection with the overall level of profitability on a year-to-date basis, as well as the anticipated mix of cash and stock-based awards. We have capitalized and therefore excluded employee compensation and benefits related to software development of $8.7 million and $8.6 million for the three months ended September 30, 2016. The increase in compensation levels was primarily attributable to the increased headcount as a result of the Acquisition of KCG. Employee compensation expense for the interim period is accrued in connection with the Adjusted Net Trading Income for the period with certain adjustments made at management’s discretion.

2020, and 2019, respectively.


Interest and Dividends Expense. dividends expense. Interest and dividends expense increased $15.6decreased $7.2 million, or 100.0%20.8%, to $31.2$27.4 million for the three months ended September 30, 2017,2020, compared to $15.6$34.5 million for the three months ended September 30, 2016.2019. This increasedecrease was primarily attributable to higherlower interest expense incurred on cash collateral received as part of securities lending transactions, resultingas well as a reduction in securities lending transactions for the period compared to the same period during the prior year. As indicated above, rather than analyzing interest and dividends expense in isolation, we evaluate it in the broader context of our Adjusted Net Trading Income.

Operations and administrative. Operations and administrative expense decreased $0.7 million, or 2.8%, to $24.6 million for the three months ended September 30, 2020, compared to $25.3 million for the three months ended September 30, 2019. This decrease was primarily attributable to decreases in travel and entertainment due to the on-going effects of the COVID-19 pandemic as well as the on-going efforts to consolidate office premises and professional services after the ITG Acquisition.

Depreciation and amortization. Depreciation and amortization decreased $0.9 million, or 5.4%, to $16.7 million for the three months ended September 30, 2020, compared to $17.6 million for the three months ended September 30, 2019. This decrease was primarily attributable to certain assets being fully depreciated partially offset by an increase in capital expenditures on telecommunication, networking and other assets.

Amortization of purchased intangibles and acquired capitalized software. Amortization of purchased intangibles and acquired capitalized software decreased $0.6 million, or 3.4%, to $18.3 million for the three months ended September 30, 2020, compared to $18.9 million for the three months ended September 30, 2019. This decrease was due to certain technology intangible assets acquired in connection with the KCG Acquisition being fully amortized.

Termination of office leases. Termination of office leases decreased $1.2 million, or 95.3%, to $0.1 million for the three months ended September 30, 2020, compared to $1.3 million for the three months ended September 30, 2019. The decrease in termination of office leases was due to the impairment of operating lease right-of-use assets and leasehold improvements and fixed assets incurred in 2019 for certain abandoned office space as part of the effort to integrate and consolidate office space in connection with the ITG Acquisition. There were minimal expenses incurred on termination of office leases for the three months ended September 30, 2019.

Debt issue cost related to debt refinancing and prepayment. Expense from debt issue costs related to debt refinancing, prepayment and commitment fees was $9.9 million for the three months ended September 30, 2020. There were no debt issue costs related to debt refinancing and prepayment for the three months ended September 30, 2019 as there were no refinancings or repayments during this period. The increase was primarily driven by the amortization of debt issue costs related to the Founder Member Loan Facility (as described in Note 10 “Borrowings” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q), in addition to debt issue costs related to the $100.0 million prepayment made during the three months ended September 30, 2020.

Transaction advisory fees and expenses. Transaction advisory fees and expenses decreased $4.7 million, or 65.6% to $2.5 million for the three months ended September 30, 2020, compared to $7.2 million during the three months ended September 30, 2019. The decrease was due to professional fees incurred in 2019 as a result of the ITG Acquisition. For the three months ended September 30, 2020, we incurred one-time transaction costs of $2.5 million in relation to the sale of MATCHNow, as discussed in Note 4 "Sale of MATCHNow" of Part I Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q.

Financing interest expense on long-term borrowings. Financing interest expense on long-term borrowings decreased $13.8 million, or 40.5%, to $20.4 million for the three months ended September 30, 2020, compared to $34.2 million for the three months ended September 30, 2019. This decrease was primarily attributable to the decrease in outstanding principal as a result of the prepayment on the First Lien Term Loan Facility in the second and third quarter of 2020.

76

Provision for (benefit from) income taxes

We incur corporate tax at the U.S. federal income tax rate on our taxable income, as adjusted for noncontrolling interest in Virtu Financial. Our income tax expense reflects such U.S. federal income tax as well as taxes payable by certain of our non-U.S. subsidiaries. Our provision for (benefit from) income taxes was $52.8 million for the three months ended September 30, 2020, compared to $(0.6) million for the three months ended September 30, 2019. The change was primarily due to the income before income taxes and noncontrolling interest for the three months ended September 30, 2020, compared to a loss before income taxes and noncontrolling interest for the three months ended September 30, 2019.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Total Revenues

Our total revenues increased $1,444.8 million, or 129.2%, to $2,562.6 million for the nine months ended September 30, 2020, compared to $1,117.9 million for the nine months ended September 30, 2019. This increase was primarily attributable to an increase in Trading income, net, of $1,304.1 million, which was driven by higher market volatility and trading volumes during the first three quarters of 2020 compared to 2019, from the acquisitionimpacts of KCG.COVID-19 and the governmental and other responses thereto. In addition, 2020 included the results of ITG for the full first quarter of 2020 compared to the results of ITG from the ITG Closing Date through September 30, 2019 in the prior year.

Though our total revenues increased during the period, Commissions, net and technology services within the Execution Services segment did not have the same relative increase in part because we selectively limited our client trading business during certain periods throughout the past nine months due to the extraordinary volume and volatility during the period and the operational challenges caused directly or indirectly by COVID-19, including working remotely and increases in short term liquidity requirements.

The following table shows the total revenues by segment for the nine months ended September 30, 2020 and 2019.

Nine Months Ended September 30,
(in thousands, except for percentage)20202019% Change
Market Making
Trading income, net$1,989,176 $680,224 192.4%
Interest and dividends income46,216 64,404 (28.2)%
Commissions, net and technology services9,526 17,213 (44.7)%
Other, net19,382 235 NM
Total revenues from Market Making2,064,300 762,076 170.9%
Execution Services
Trading income, net(1,420)3,387 NM
Interest and dividends income572 12,241 (95.3)%
Commissions, net and technology services442,807 342,681 29.2%
Other, net58,662 16 NM
Total revenues from Execution Services500,621 358,325 39.7%
Corporate
Other, net(2,286)(2,528)(9.6)%
Total revenues from Corporate(2,286)(2,528)(9.6)%
Consolidated
Trading income, net1,987,756 683,611 190.8%
Interest and dividends income46,788 76,645 (39.0)%
Commissions, net and technology services452,333 359,894 25.7%
Other, net75,758 (2,277)NM
Total revenues$2,562,635 $1,117,873 129.2%

77
Trading income, net. Trading income, net was primarily earned by our Market Making segment. Trading income, net, increased $1,304.1 million, or 190.8%, to $1,987.8 million for the nine months ended September 30, 2020, compared to $683.6 million for the nine months ended September 30, 2019. The increase was primarily driven by the higher market volatility and trading volumes across global markets and major asset categories during the nine months ended September 30, 2020 compared to the same period in the prior year. Average daily realized volatility of the S&P 500 Index increased 165.2% compared to the prior period, while average daily U.S. equity consolidated volumes increased 55.5%. Rather than analyzing trading income, net, in isolation, we evaluate it in the broader context of our Adjusted Net Trading Income, together with Interest and dividends income, Interest and dividends expense, Commissions, net and technology services and Brokerage, exchange, clearance fees and payments for order flow, net, each of which are described below.

Interest and dividends income. Interest and dividends income was primarily earned by our Market Making segment. Interest and dividends income decreased $29.9 million, or 39.0%, to $46.8 million for the nine months ended September 30, 2020, compared to $76.6 million for the nine months ended September 30, 2019. This decrease was primarily attributable to lower interest income earned on cash collateral posted as part of securities borrowed transactions driven by lower interest rates and lower balances compared to the prior period. As indicated above, rather than analyzing interest and dividends income in isolation, we evaluate it in the broader context of our Adjusted Net Trading Income.

Commissions, net and technology services. Commissions, net and technology services revenues were primarily earned by our Execution Services segment. Commissions, net and technology services revenues increased $92.4 million, or 25.7%, to $452.3 million for the nine months ended September 30, 2020, compared to $359.9 million for the nine months ended September 30, 2019. The increase was primarily attributable to the results of ITG for the full first quarter of 2020 compared to the results of ITG from the ITG Closing Date through March 31, 2019. The ITG Acquisition brought recurring connectivity revenues generated from workflow technology and subscription revenues from analytics services to Commissions, net and technology services.

Other, net. Other, net increased $78.0 million, or 3,427.1%, to $75.8 million for the nine months ended September 30, 2020, compared to $(2.3) million for the nine months ended September 30, 2019. The increase was primarily due to a $58.7 million gain recognized on the sale of MATCHNow (see Note 4 "Sale of MATCHNow" of Part I Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q). In addition, we recognized a $17.4 million gain on the minority investment in SBI Japannext (see Note 11 "Financial Assets and Liability" of Part I Item I "Financial Statements" of this Quarterly Report on Form 10-Q for details on the SBI Investment).

Adjusted Net Trading Income

Adjusted Net Trading Income increased $1,097.9 million, or 153.0%, to $1,815.5 million for the nine months ended September 30, 2020, compared to $717.5 million for the nine months ended September 30, 2019. This increase was primarily attributable to higher Trading income, net, driven by higher market volatility and trading volumes across major asset categories during the nine months ended September 30, 2020 compared to the prior period. Average daily realized volatility of the S&P 500 Index and average daily CVIX realized volatility increased 165.2% and 101.1%, respectively, compared to the prior period, while average daily U.S. equity consolidated volumes increased 55.5%. There were increases in Trading income, net in Global Equities of $907.7 million, and in Global FICC, Options and Other of $100.5 million, from the Market Making segment. There was also an increase of $89.6 million, or 33.9%, in the Execution Services segment primarily driven by the increase in Commissions, net and technology services that was primarily attributable to the results of ITG for the full first quarter of 2020 compared to the results of ITG from the ITG Closing Date through March 31, 2019. Adjusted Net Trading Income per day increased $5.8 million, or 153.0%, to $9.6 million for the nine months ended September 30, 2020, compared to $3.8 million for the nine months ended September 30, 2019. The number of trading days was 189 for both the nine months ended September 30, 2020 and 2019, respectively. Adjusted Net Trading Income is a non-GAAP measure. For a full description of Adjusted Net Trading Income and a reconciliation of Adjusted Net Trading Income to trading income, net, see “Non-GAAP Financial Measures and Other Items” in this “Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations”.

Operating Expenses

Our operating expenses increased $232.9 million, or 19.3%, to $1,439.4 million for the nine months ended September 30, 2020, compared to $1,206.5 million for the nine months ended September 30, 2019. The increase in operating expenses was primarily due to higher trading related expenses as a result of the increases in volumes traded during the nine months ended September 30, 2020 compared to the prior period. Additionally, the results of ITG for the full first quarter of 2020 compared to the one-month results of ITG from the ITG Closing Date through March 31, 2019 caused an overall increase in expenses in multiple expense categories as described in more detail below.
78

Brokerage, exchange, clearance fees and payments for order flow, net. Brokerage, exchange, clearance fees and payments for order flow, net, increased $287.9 million, or 100.7%, to $573.8 million for the nine months ended September 30, 2020, compared to $285.9 million for the nine months ended September 30, 2019. This increase was primarily attributable to an increase in payments for order flow and increases in volumes we traded in Global Equities instruments and other asset categories. The increase in payments for order flow was primarily attributable to the increase in volumes from our broker-dealer clients eligible for payments for order flow, driven by high participation of retail investors in the market during the past nine months compared to the same period during the prior year. We evaluate this category, representing direct costs associated with transacting our business in the broader context of our Adjusted Net Trading Income.

Communication and data processing. Communication and data processing expense increased $6.3 million, or 4.1%, to $162.3 million for the nine months ended September 30, 2020, compared to $156.0 million for the nine months ended September 30, 2019. This increase was primarily attributatble to the results of ITG for the full first quarter in 2020 compared to the results of ITG from the ITG Closing Date through March 31, 2019, as well as additional telecommunication and networking services from activating our back-up facilities and enabling the majority of our employees to work from home. The increase was partially offset by reductions in connectivity connections as a result of an on-going effort to consolidate various communication and data processing subscriptions.

Employee compensation and payroll taxes. Employee compensation and payroll taxes increased $45.0 million, or 15.9%, to $327.1 million for the nine months ended September 30, 2020, compared to $282.1 million for the nine months ended September 30, 2019. The increase in compensation levels was primarily attributable to increased incentive compensation, which is recorded at management’s discretion and is generally accrued in connection with the overall level of profitability. Furthermore, we incurred additional compensation expense as a result of one-time cash bonuses awarded to certain employees to mitigate the effects of the COVID-19 pandemic. We have capitalized and therefore excluded employee compensation and benefits related to software development of $28.1 million and $25.3 million for the nine months ended September 30, 2020 and 2019, respectively.

Interest and dividends expense. Interest and dividends expense decreased $19.1 million, or 16.3%, to $97.7 million for the nine months ended September 30, 2020, compared to $116.7 million for the nine months ended September 30, 2019. This decrease was primarily attributable to lower interest expense incurred on cash collateral received as part of securities lending transactions. As indicated above, rather than analyzing interest and dividends expense in isolation, we generally evaluate it in the broader context of our Adjusted Net Trading Income.


Operations and Administrative. administrative. Operations and administrative expense increased $18.7decreased $2.8 million, or 340.0%3.7%, to $24.2$73.5 million for the threenine months ended September 30, 2017,2020, compared to $5.5$76.3 million for the threenine months ended September 30, 2016.2019. The increasedecrease was primarily attributable to decreases in travel and entertainment due to the increase in legalon-going effects of the COVID-19 pandemic as well the on-going efforts to consolidate office premises and other professional fees resulting fromservices after the Acquisition of KCG duringITG Acquisition.

Depreciation and amortization. Depreciation and amortization increased $1.9 million, or 3.8%, to $50.7 million for the threenine months ended September 30, 2017.

Depreciation and Amortization. Depreciation and amortization increased $8.4 million, or 116.7%,2020, compared to $15.6$48.9 million for the threenine months ended September 30, 2017, compared to $7.2 million for the three months ended September 30, 2016.2019. This increase was primarily attributable to depreciation and amortization of additional assets resulting from the AcquisitionITG acquisition for the full first quarter of KCG2020 compared to the prior period which excluded depreciation and an increaseamortization on ITG assets prior to the ITG Closing Date, partially offset by certain assets being fully depreciated in capital expenditures on telecommunication, networking and other assets.

Amortization of Purchased Intangibles and Acquired Capitalized Software. 2020.


Amortization of purchased intangibles and acquired capitalized software. Amortization of purchased intangibles and acquired capitalized software increased $5.7 million, or 11.4%, to $6.4$56.2 million for the threenine months ended September 30, 2017,2020, compared to $0.1$50.4 million for the threenine months ended September 30, 2016.This2019. This increase was primarily attributabledue to the amortization of intangible assets acquired intangibles in connection with the ITG Acquisition for a full three quarters in 2020 versus the period from the ITG Closing Date through September 30, 2019.

Termination of KCGoffice leases. Termination of office leases was $0.3 million for the nine months ended September 30, 2020, compared to $66.5 million for the nine months ended September 30, 2019. The decrease in termination of office leases was due to the impairment of operating lease right-of-use assets and leasehold improvements and fixed assets incurred in 2019 for certain abandoned office space as part of the Teza acquisition.

effort to integrate and consolidate office space in connection with the ITG Acquisition.


Debt Issue Costs Relatedissue costs related to Debt Refinancing.debt refinancing, prepayment and commitment fees. Expense from debt issue costs related to debt refinancing, was $4.9prepayment and commitment fees increased $19.4 million, or 245.6%, to $27.3 million for the threenine months
79
ended September 30, 2020, compared to $7.9 million for the nine months ended September 30, 2017. These costs reflect $4.9 million acceleration2019. This was primarily driven by amortization of debt issue costs associated with makingrelated to the Founder Member Loan Facility (see Note 10 “Borrowings” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q), which expired as of September 20, 2020 , in addition to debt issue costs related to a $200$288.5 million voluntary prepayment on our senior secured first lien term loan. We had no such expensemade during the threenine months ended September 30, 2016.

2020. The amount for the nine months ended September 30, 2019 mainly reflects costs incurred related to the termination of the Existing Term Loan Facility (as defined below) in the first quarter of 2019.


Transaction Advisory Feesadvisory fees and Expenses.expenses. Transaction advisory fees and expenses increased $15.7decreased $21.3 million, or 88.6%, to $2.7 million for the threenine months ended September 30, 2017,2020, compared to $0.5$24.1 million for the threenine months ended September 30, 2016. The increase reflects nonrecurring professional fees incurred in connection with the KCG Acquisition. 

Charges related to share based compensation at IPO. Charges related to share based compensation at IPO decreased $0.2 million, or 46.0%, to $0.2 million for the three months ended September 30, 2017, compared to $0.3 million for the three months ended September 30, 2016.2019. The decrease was primarily attributable to the fact that certain Class B and East MIP Class B interests became fully vested, and as well asITG Acquisition, for which we incurred significant transaction advisory fees during 2019. The decrease was partially offset by increases related to the difference in forfeituresone-time transaction costs incurred in 2017 versus 2016. We recognized $0.19 million of charges, net of forfeitures, related to share based compensation at IPO, and approximately $0.17 million in respectas a result of the outstanding time vested Class B and East MIP Class B interests, and approximately $0.02 million amortizationsale of capitalized costs attributable to employees incurred in development of software for internal use.

Financing Interest Expense on Long Term Borrowings.  MATCHNow.


Financing interest expense on senior secured credit facility increased $17.2long term borrowings. Financing interest expense on long-term borrowings decreased $23.9 million, or 232.4%26.1%, to $24.6$67.8 million for the threenine months ended September 30, 2017,2020, compared to $7.4$91.7 million for the threenine months ended September 30, 2016.2019. This increasedecrease was dueprimarily attributable to the refinancing to the senior secured first lien term loan and offeringa decrease in outstanding principal as a result of the senior secured second lien notes,First Lien Term Loan Facility and the Incremental Term Loans in addition to lower interest rates as discussed in Note 9 to the notes10 “Borrowings” of the

Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

61


Table of Contents

condensed consolidated financial statements. The increase in financing interest expense was primarily attributable to the increase in long-term borrowings outstanding principal.

Provision for (Benefit(benefit from) Income Taxes

Following the consummation of the Reorganization Transactions and the IPO, weincome taxes


We incur corporate tax at the U.S. federal income tax rate on our taxable income, as adjusted for noncontrolling interest in Virtu Financial. Our income tax expense reflects such U.S. federal income tax as well as taxes payable by certain of our non-U.S. subsidiaries. Our provision for income taxes was a benefit of $(6.5) million for the three months ended September 30, 2017, compared to a provision of $4.9 million for the three months ended September 30, 2016. The decrease in provision for income taxes was primarily attributable to the decrease in income before income taxes and noncontrolling interest.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

Total Revenues

Our total revenues increased $31.9 million, or 6.0%, to $563.5$200.0 million for the nine months ended September 30, 2017,2020, compared to $531.6a benefit from income taxes of $(14.3) million for the nine months ended September 30, 2016. This increase2019. The change was primarily attributabledue to an increase in Commission, netthe income before income taxes and technology services of $42.0 million and an increase innoncontrolling interest and dividends income of $15.9 million, partially offset by a decrease in trading income, net, of $29.9 million.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30,

 

(in thousands, except for percentage)

 

 

2017

 

 

2016

 

 

% Change

 

Market Making

 

 

 

 

 

 

 

 

 

 

Trading revenues, net

 

$

482,281

 

$

509,542

 

 

-5.4%

 

Interest and dividends income

 

 

30,558

 

 

14,961

 

 

104.3%

 

Commissions, net and technology services

 

 

1,563

 

 

 -

 

 

NM

 

Other, net

 

 

421

 

 

 -

 

 

NM

 

Total revenues from Market Making

 

$

514,823

 

$

524,503

 

 

-1.8%

 

 

 

 

 

 

 

 

 

 

 

 

Execution Services

 

 

 

 

 

 

 

 

 

 

Trading revenues, net

 

$

(3,341)

 

$

 -

 

 

NM

 

Interest and dividends income

 

 

104

 

 

 -

 

 

NM

 

Commissions, net and technology services

 

 

47,674

 

 

7,224

 

 

559.9%

 

Other, net

 

 

527

 

 

 -

 

 

NM

 

Total revenues from Execution Services

 

$

44,964

 

$

7,224

 

 

522.4%

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

 

 

 

Trading revenues, net

 

$

704

 

$

 -

 

 

NM

 

Interest and dividends income

 

 

271

 

 

 -

 

 

NM

 

Commissions, net and technology services

 

 

 -

 

 

 -

 

 

NM

 

Other, net

 

 

2,699

 

 

(102)

 

 

NM

 

Total revenues from Corporate

 

$

3,674

 

$

(102)

 

 

NM

 

Trading Income, Net. Trading income, net, primarily relate to our Market Making segment. Trading income, net decreased $29.9 million, or 5.9%, to $479.6 million for the nine months ended September 30, 2017, compared to $509.5 million for the nine months ended September 30, 2016. The decrease was primarily attributable to the decreased market volume and volatility across major asset categories and was offset, in part, by the effect of the Acquisition of KCG. Rather than analyzing trading income, net, in isolation, we generally evaluate it in the broader context of our Adjusted Net Trading Income, together with interest and dividends income, interest and dividends expense and brokerage, exchange and clearance fees, net, each of which are described below.

Interest and Dividends Income. Interest and dividends income, which was primarily recorded in our Market Making segment, increased $15.9 million, or 106.0%, to $30.9 million for the nine months ended September 30, 2017, compared to $15.0 million for the nine months ended September 30, 2016. This increase was primarily attributable to the Acquisition of KCG and higher interest income earned on cash collateral posted as part of securities borrowed

62

Table of Contents

transactions. As indicated above, rather than analyzing interest and dividends income in isolation, we generally evaluate it in the broader context of our Adjusted Net Trading Income.

Commissions, net and Technology Services. Commissions, net and technology services revenues are primarily earned by our Execution Services segment. Such revenues include technology licensing fees and agency commission fees. Commissions, net and technology services revenues increased $42.0 million, or 583.3%, to $49.2 million for the nine months ended September 30, 2017, compared to $7.2 million for the nine months ended September 30, 2016.  The increase was primarily attributable to the Acquisition of KCG, as well as agency fee revenues arising from new customers we onboarded.

Other, net. Other, netrevenue is primarily recorded in our Corporate segment. Other, net, was $3.6 million for the nine months ended September 30, 2017 as2020, compared to a loss of $0.1 million for the nine months ended September 30, 2016.  The increase in revenue recorded in Other, net was primarily a result of the Acquisition of KCG, which resulted in recording revenue related to our microwave JV.  Other, net also includes revenue earned or loss incurred as a result of the foreign currency revaluations on the Japanese Yen based minority investment and the SBI Bonds, which were $1.2 million and $(1.2) million, respectively, for the nine months ended September 30, 2017, and $1.4 million and $(1.5) million for the nine months ended September 30, 2016..

Adjusted Net Trading Income

Adjusted Net Trading Income decreased $2.0 million, or 0.6%, to $319.0 million for the nine months ended September 30, 2017, compared to $321.1 million for the nine months ended September 30, 2016. This slight decrease compared tobefore taxes during the prior period reflects increases (decreases) in Adjusted Net Trading Income in the following categories: $41.8 million from Americas equities, $(16.1)  million from ROW equities, $(54.2) million from Global FICC, Options and Other. Adjusted Net Trading Income related to execution services increased $26.9 million to $34.1 million for the nine months ended September 30, 2017 from $7.2 million for the nine months ended September 30, 2016. 

The slight decrease in Adjusted Net Trading Income was primarily attributable to less favorable conditions across all asset classes as a result of lower levels of volume and volatility within the equities, currencies, and commodities markets that persisted throughout the nine months ended September 30, 2017, offset largely by the effect of the Acquisition of KCG. Adjusted Net Trading Income per day was essentially flat; $1.70 million for the nine months ended September 30, 2017 and 2016. The number of trading days were 188 and 189 for the nine months ended September 30, 2017 and 2016, respectively.

Operating Expenses

Our operating expenses increased $190.3 million, or 48.7%, to $580.9 million for the nine months ended September 30, 2017, compared to $390.6 million for the nine months ended September 30, 2016. This increase was primarily due to increases in brokerage, exchange, and clearance fees of $2.9 million, employee compensation and payroll taxes of $46.9 million, interest and dividend expense of $15.3 million, depreciation and amortization expense of $6.5 million, in communication and data processing of $29.6 million, debt issue cost related to debt of $9.4 million, transaction advisory fees and expenses of $24.0 million, operating and administrative expenses of $21.9 million, and financing interest expense on long term borrowings of $18.5 million. Amortization of purchased intangibles and acquired capitalized software increased to $6.3 million for the nine months ended September 30, 2017 compared to $0.2 million for the nine months ended September 30, 2016 as a result of the amortization of intangible resulting from the Acquisition of KCG. Payments for order flow was $12.1 million for the nine months ended September 30, 2017 as a result from the Acquisition of KCG, we had no such expense for the nine months ended September 30, 2016.

Brokerage, Exchange and Clearance Fees, Net. Brokerage exchange and clearance fees, net, increased $2.9 million, or 1.7%, to $170.3 million for the nine months ended September 30, 2017, compared to $167.4 million for the nine months ended September 30, 2016. This increase was primarily attributable to the increase in trading activities as a of the Acquisition of KCG, which was offset by the decreases in market volume and volatility traded across various instruments in which we make markets. As indicated above, rather than analyzing brokerage, exchange and clearance fees, net, in isolation, we generally evaluate it in the broader context of our Adjusted Net Trading Income.

year period.

63


Table of Contents

Payments for Order Flow.  Payments for order flow were $12.1 million for the nine months ended September 30, 2017, and was primarily attributable to the Acquisition of KCG. There were no payments for order flow for the nine months ended September 30, 2016. Payments for order flow primarily represent payments to broker dealer clients, in the normal course of business, for directing to us their order flow primarily in U.S. equities. Payments for order flow also fluctuate based on U.S. equity share and option volumes, our profitability and the mix of market orders, limit orders, and customer mix.

Communication and Data Processing. Communication and data processing expense increased $29.6 million, or 55.2%, to $83.2 for the nine months ended September 30, 2017, compared to $53.6 million for the nine months ended September 30, 2016. This increase was primarily due to new connectivity connections, market data, and software subscriptions as a result of the Acquisition of KCG. The increase was partially offset by reductions in expenses due to cancellation and discontinuance of connectivity connections, market data and software subscriptions.

Employee Compensation and Payroll Taxes. Employee compensation and payroll taxes increased $46.9 million, or 73.1%, to $111.1 million for the nine months ended September 30, 2017, compared to $64.2 million for the nine months ended September 30, 2016. The increase in compensation levels was primarily attributable to the increased headcount as a result of the Acquisition of KCG. Employee compensation expense for the interim period is accrued in connection with the Adjusted Net Trading Income for the period with certain adjustments made at management’s discretion.

Interest and Dividends Expense. Interest and dividends expense increased $15.3 million, or 35.4%, to $58.5 million for the nine months ended September 30, 2017, compared to $43.2 million for the nine months ended September 30, 2016. This increase was primarily attributable to higher interest expense incurred on cash collateral received as part of securities lending transactions resulting from the Acquisition of KCG. As indicated above, rather than analyzing interest and dividends expense in isolation, we generally evaluate it in the broader context of our Adjusted Net Trading Income.

Operations and Administrative. Operations and administrative expense increased $21.9 million, or 135.2%, to $38.1 million for the nine months ended September 30, 2017, compared to $16.2 million for the nine months ended September 30, 2016. The increase was primarily attributable to increase in legal and other professional fees resulting from the Acquisition of KCG.

Depreciation and Amortization. Depreciation and amortization increased $6.5 million, or 28.6%, to $29.2 million for the nine months ended September 30, 2017, compared to $22.7 million for the nine months ended September 30, 2016. This increase was primarily attributable to depreciation and amortization of additional assets resulting from the Acquisition of KCG and an increase in capital expenditures on telecommunication, networking and other assets.

Amortization of Purchased Intangibles and Acquired Capitalized Software. Amortization of purchased intangibles and acquired capitalized software increased $6.3 million for the nine months ended September 30, 2017, compared to $0.2 million for the nine months ended September 30, 2016. This increase was primarily attributable to acquired intangibles in connection with the Acquisition of KCG and the Teza acquisition.

Debt Issue Costs Related to Debt Refinancing. Expense from debt issue costs related to debt refinancing was $9.4 million for the nine months ended September 30, 2017. These costs reflect $4.5 million of expense incurred from refinancing of our senior secured first lien term loan and senior secured second lien notes in June 2017; and $4.9 million acceleration of debt issue costs associated with making a $200 million voluntary prepayment on our senior secured first lien term loan. We had no such expense during the nine months ended September 30, 2016.

Transaction Advisory Fees and Expenses.  Transaction advisory fees and expenses increased $24.0 million, to $24.2 million for the nine months ended September 30, 2017, compared to $0.2 million for the nine months ended September 30, 2016. The increase primarily reflects nonrecurring professional fees incurred in connection with the KCG Acquisition.

64

Table of Contents

Reserve for Legal Matter. In December 2015, the enforcement committee of the Autorité des marchés financiers (“AMF”) fined our European subsidiary in the amount of €5.0 million (approximately $5.4 million) based on its allegations that the subsidiary of MTH engaged in price manipulation and violations of the AMF General Regulation and Euronext Market Rules.  In accordance with the foregoing, we have accrued an estimated loss in relation to the fine imposed by the AMF. In May 2017, the fine was reduced to €3.0 million (approximately $3.5 million) as a result of an appeal against the AMF. The adjustment related to the reserve for this legal matter was a decrease of  €2.0 million (approximately $2.2 million) during the nine months ended September 30, 2017. We had no such adjustment during the nine months ended September 30, 2016.

Charges related to share based compensation at IPO. Charges related to share based compensation at IPO decreased $0.9 million, to $0.5 million for the nine months end September 30, 2017, compared to the $1.4 million for the nine months ended September 30, 2016. The decrease was primarily attributable to the fully vesting of certain Class B and East MIP Class B interests.

Financing Interest Expense on Long Term Borrowings. Financing interest expense on long-term borrowings increased $18.5 million, or 85.6%, to $40.1 million for the nine months ended September 30, 2017, compared to $21.6 million for the nine months ended September 30, 2016. This increase was due to the refinancing of the senior secured first lien term loan and the offering of the senior secured second lien notes, as discussed in Note 9 to the notes to the condensed consolidated financial statements. The increase in financing interest expense was primarily attributable to the increase in long-term borrowings outstanding principal from $565.0 million as of December 31, 2016 to $1,481.1 million as of September 30, 2017.

Provision for (Benefit from) Income Taxes

However, following the consummation of the Reorganization Transactions and the IPO, we incur corporate tax at the U.S. federal income tax rate on our taxable income, as adjusted for noncontrolling interest in Virtu Financial.  Our income tax expense reflects such U.S. federal income tax as well as taxes payable by certain of our non-U.S. subsidiaries. Our provision for income taxes was a benefit of $(2.9) million for the nine months ended September 30, 2017, compared to a provision of $17.3 million for the nine months ended September 30, 2016. The decrease in provision for income taxes of $20.2 million, or 116.8%, was primarily attributable to the decrease in the income before income taxes and noncontrolling interest.

Liquidity and Capital Resources


General


As of September 30, 2017,2020, we had $558.0$567.7 million in cashCash and cash equivalents. Cash and cash equivalents areThis balance is maintained primarily to support operating activities and for capital expenditures and for short-term access to liquidity, and for other general corporate purposes. As of September 30, 2017,2020, we had borrowings under our short-termprime brokerage credit facilities of approximately $159.1$163.6 million, borrowings under our broker dealer facilities of $15.0$78.0 million, short-term bank overdrafts of $47.0 million, and long-term debt borrowing outstanding in an aggregate principal amount of approximately $1481.1$1,669.7 million. As of September 30, 2017,2020, our regulatory capital requirements for Virtu Americas LLC, our domestic U.S. subsidiaries were $3.0 million, in aggregate.

broker-dealer subsidiary, was $2.5 million.


The majority of our trading assets consist of exchange-listed marketable securities, which are marked-to-market daily, and collateralized receivables from broker-dealers and clearing organizations arising from proprietary securities transactions. Collateralized receivables consist primarily of securities borrowed, receivables from clearing houses for settlement of securities transactions and, to a lesser extent, securities purchased under agreements to resell. We actively manage our liquidity, and we maintain significant borrowing facilities through the securities lending markets and with banks and prime brokers. We have continually received the benefit of uncommitted margin financing from our prime brokers globally. These margin facilities are secured by securities in accounts held at the prime broker.brokers. For purposes of providing additional liquidity, we maintain a committed revolvingcredit facility and an uncommitted credit facility for Virtu Financial BD LLC (“VFBD”), one of our wholly ownedwholly-owned broker-dealer subsidiaries. Effective July 18, 2016, we entered into an amendment to extend the term of the committed broker dealer credit facilities, to July 17, 2017,subsidiaries, as discussed in Note 910 “Borrowings” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

As a result of the accompanying condensed consolidated financial statements.

65

substantially elevated volume and volatility environment during the quarter attributable largely to the COVID-19 pandemic and governmental and other responses thereto, our trading activities both in our market making segment and in our execution services segment increased materially relative to the equivalent period in the prior year. This increase in our activity and our customers’ activity together with the extraordinary volatility during certain periods within the quarter has driven our short-term liquidity needs significantly higher as compared to prior periods, though these levels declined meaningfully during the second and third quarter relative to their peaks in the first quarter of 2020. In order to manage these increased daily funding obligations, we have taken steps to increase available short-term liquidity and to reduce our short term funding requirements. Increases to our available short-term liquidity included entering into the Founder Member Loan Facility (as defined below, and which expired in the third quarter of 2020), the Demand Loan (as defined below, which was fully repaid

80

during the second quarter of 2020) and certain changes to the Committed Broker Dealer Facility, each of which are described in further detail below as well as in Note 10 “Borrowings” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q. Steps taken to reduce our short-term funding requirements have included arranging for select clients trades to be cleared by another large financial institution, reducing limits on daily client trading activity on a client-by-client basis and selectively reducing our market making activities in certain asset classes or products.


Based on our current level of operations and following the steps taken as detailed above, we believe our cash flows from operations, available cash and cash equivalents, and available borrowings under our broker-dealer revolving credit facilityfacilities will be adequate to meet our future liquidity needs for more than the next twelve months. We anticipate that our primary upcoming cash and liquidity needs will be increased margin requirements from increased trading activities in markets where we currently provide liquidity and in new markets into which we plan to expand. We manage and monitor our margin and liquidity needs on a real-time basis and can adjust our requirements both intra-day and inter-day, as required.

We do not believe that the impacts of COVID-19 or the governmental and other responses thereto to date have adversely impacted our long term financial condition or long term capital requirements.


We expect our principal sources of future liquidity to come from cash flows provided by operating activities and financing activities. In addition, we have broad discretion as to the application of the net proceeds received from the IPO for working capital and general corporate purposes. Certain of our cash balances are insured by the Federal Deposit Insurance Corporation, generally up to $250,000 per account but without a cap under certain conditions. From time to time these cash balances may exceed insured limits, but we select financial institutions deemed highly creditworthycredit worthy to minimize risk. We consider highly liquid investments with original maturities of less than three months, when acquired, to be cash equivalents.


Tax Receivable Agreements


Generally, we are required under the tax receivable agreements entered into in connection with our IPO to make payments to certain direct or indirect equityholdersequity holders of Virtu Financial that are generally equal to 85% of the applicable cash tax savings, if any, that we actually realize as a result of favorable tax attributes that will beare available to us as a result of the Reorganization Transactions, for exchanges of membership interests for Class A common stockCommon Stock or Class B common stockCommon Stock and payments made under the tax receivable agreements. We will retain the remaining 15% of theseany such cash tax savings. We expect that future payments to certain direct or indirect equityholdersequity holders of Virtu Financial described in Note 136 “Tax Receivable Agreements” to the condensed consolidated financial statements included hereinin Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q are expected to aggregate to approximately $238.6 million, rangingrange from approximately $0.4$3.3 million to $21.4$20.7 million per year over the next 15 years. Such payments will occur only after we have filed our U.S. federal and state income tax returns and realized the cash tax savings from the favorable tax attributes. TheWe made our first payment was originally due after the filing of $7.0 million in February 2017, our tax return for the year ended December 31, 2015, which was duesecond payment of $12.4 million in September 2018, and our third payment of $13.3 million in March 15, 2016, but which was extended to September 15, 2016.2020. Future payments under the tax receivable agreements in respect of subsequent exchanges would be in addition to these amounts. We currently expect to fund these payments from realized cash flowtax savings from operations generated by our subsidiaries as well as from excessthe favorable tax distributions that we receive from our subsidiaries. We made our first payment of $7.0 million in February 2017.

attributes.


Under the tax receivable agreements, as a result of certain types of transactions and other factors, including a transaction resulting in a change of control, we may also be required to make payments to certain direct or indirect equityholdersequity holders of Virtu Financial in amounts equal to the present value of future payments we are obligated to make under the tax receivable agreements. IfWe would expect any acceleration of these payments to be funded from the realized favorable tax attributes. However, if the payments under the tax receivable agreements are accelerated, we may be required to raise additional debt or equity to fund such payments. To the extent that we are unable to make payments under the tax receivable agreements for any reason (including because our senior secured credit facility agreementAmended Credit Agreement restricts the ability of our subsidiaries to make distributions to us) such payments will be deferred and will accrue interest until paid.


Regulatory Capital Requirements

Certain of our


Our principal operating subsidiaries areU.S. subsidiary is subject to separate regulation and capital requirements in the United States and other jurisdictions. VFBD, Virtu Financial Capital Markets LLC (“VFCM”), Virtu Americas LLC which became an indirect subsidiary of Virtu following the Acquisition, are registered U.S. broker-dealers, and their primary regulators include the SEC, the Chicago Stock Exchange and FINRA. VFIL is a registered investment firm under the Market in Financial Instruments Directive,U.S. broker-dealer, and its primary regulator isinclude the Central Bank of Ireland.

SEC and FINRA.


The SEC and FINRA impose rules that require notification when regulatory capital falls below certain pre-defined criteria. These rules also dictate the ratio of debt-to-equity in the regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances. If a firm fails to maintain the required regulatory capital, it may be subject to suspension or revocation of registration by the applicable

66

Table of Contents

regulatory agency, and suspension or expulsion by these regulators could ultimately lead to the firm’s liquidation. Additionally, certain applicable rules impose requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to and/or approval from the SEC the Chicago Stock Exchange and FINRA for certain capital withdrawals. VFCMVirtu Americas LLC is also

81
subject to rules set forth by NYSE MKT (formerly NYSE Amex) and is required to maintain a certain level of capital in connection with the operation of its DMMdesignated market maker business. VFIL is

Our Canadian subsidiaries, Virtu ITG Canada Corp and Virtu Financial Canada ULC, are subject to regulatory capital requirements and periodic requirements to report their regulatory capital and submit other regulatory reports set forth by the Investment Industry Regulatory Organization of Canada. Virtu Financial Ireland Limited and Virtu ITG Europe Limited are regulated by the Central Bank of Ireland as an Investment FirmFirms and in accordance with European Union law isare required to maintain a minimum amount of regulatory capital based upon itstheir positions, financial conditions, and other factors. In addition to periodic requirements to report itstheir regulatory capital and submit other regulatory reports, VFIL isVirtu Financial Ireland Limited and Virtu ITG Europe Limited are required to obtain consent prior to receiving capital contributions or making capital distributions from itstheir regulatory capital. Failure to comply with itstheir regulatory capital requirements could result in regulatory sanction or revocation of itstheir regulatory license.

The following table sets forth Virtu ITG UK Limited is regulated by the Financial Conduct Authority in the United Kingdom and is subject to similar prudential capital requirements. Virtu ITG Australia Limited, Virtu ITG Hong Kong Limited, and Virtu ITG Singapore Pte Limited are also subject to local regulatory capital level, requirementrequirements and excessare regulated by the Australian Securities Exchange, the Securities and Futures Commission, and the Monetary Authority of Singapore, respectively.


See Note 20 “Regulatory Requirement” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for domestic U.S. subsidiariesa discussion of regulatory capital requirements of our regulated subsidiaries.

Broker Dealer Credit Facilities, Short-Term Bank Loans, and Prime Brokerage Credit Facilities

We maintain various broker-dealer facilities and short-term credit facilities as part of our daily trading operations. See Note 10 “Borrowings” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for details on our various credit facilities. As of September 30, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

    

Regulatory 

    

Regulatory Capital

    

Excess Regulatory

 

(in thousands)

 

Capital

 

Requirement

 

Capital

 

Virtu Americas LLC

 

$

368,138

 

$

1,000

 

$

367,138

 

Virtu Financial BD LLC

 

 

48,308

 

 

1,000

 

 

47,308

 

Virtu Financial Capital Markets LLC

 

 

11,563

 

 

1,000

 

 

10,563

 

 

 

 

 

 

 

 

 

 

 

 

Broker-Dealer Credit Facilities

We are a party to two secured credit2020, the outstanding principal balance on our broker-dealer facilities withwas $78.0 million and the same financial institution to finance overnight securities positions purchased as part of its ordinary course broker‑dealer market making activities. One of the facilities (the “Uncommitted Facility”), is provided on an uncommitted basis and is available for borrowings by our broker‑dealer subsidiaries up to a maximum amount of $125.0 million. In connection with this credit facility, we entered into demand promissory notes dated February 20, 2013. The loans provided under the Uncommitted Facility are collateralized by our broker‑dealer trading and deposit accounts with the same financial institution and, bear interest at a rate set by the financial institution on a daily basis 2.16% at September 30, 2017 and 1.66% at December 31, 2016). The Uncommitted Facility has a 364‑day term. We are a party to another facility (the “Committed Facility”) with the same financial institution dated July 22, 2013 and subsequently amended on March 26, 2014, July 21, 2014, April 24, 2015, and July 18, 2016, which is provided on a committed basis and is available for borrowings by one of our broker‑dealer subsidiaries up to a maximum of the lesser of $75.0 million or an amount determined based on agreed advance rates for pledged securities. Borrowings under this facility are used to finance the purchase and settlement of securities and bear interest at the adjusted LIBOR rate or base rate, plus a margin of 1.25% per annum. A commitment fee of 0.25% per annum on the average daily unused portion of this facility is payable quarterly in arrears. This facility requires, among other items, maintenance of minimum net worth, minimum excess net capital and a maximum total assets to equity ratio.

Short-Term Credit Facilities

We maintainoutstanding aggregate short-term credit facilities with various prime brokers and other financial institutions from which we receivethe Company receives execution or clearing services.services was approximately $163.6 million, which was netted within Receivables from broker-dealers and clearing organizations on the Condensed Consolidated Statement of Financial Condition of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.


On March 10, 2020, a broker-dealer subsidiary of the Company entered into a short term loan arrangement with Jefferies Financial Group, Inc., as lender, for a $20 million demand loan (the "Demand Loan") repayable no later than ninety (90) days after the date of borrowing. The proceeds of these facilities are used to meet margin requirements associated with the products traded by us in the ordinary course, and amounts borrowed are collateralized by our trading accounts with the applicable financial institution.  The aggregate amount available for borrowing under these facilities was $543.0 million and $493.0 million, the outstanding principal was $159.1 million and $309.1 million, and borrowingsDemand Loan bore interest at a weighted average interest rate of 3.56% and 3.12%10% per annum, increased by 2.0% with respect to any principal amounts not paid when due and payable. The Demand Loan was repaid in full as of April 17, 2020.

On March 20, 2020, a broker-dealer subsidiary of the Company entered into a loan agreement (the “Founder Member Loan Facility”) with TJMT Holdings LLC (the “Founder Member”), as lender and administrative agent, providing for unsecured term loans from time to time (the “Founder Member Loans”) in an aggregate original principal amount not to exceed $300 million. The Founder Member Loans were available to be borrowed in one or more borrowings on or after March 20, 2020 and prior to September 30, 2017,20, 2020, though no borrowings were made during such period, which is now expired. The Founder Member is an affiliate of Mr. Vincent Viola, the Company’s founder and December 31, 2016, respectively.  Interest expenseChairman Emeritus. Upon the execution of and in relationconsideration for the Lender’s commitments under the Loan Agreement, the Company delivered to the facilitiesFounder Member a warrant to purchase shares of the Company’s Class A Common Stock, as described below.

On March 20, 2020, in connection with and in consideration of the Founder Member’s commitments under the Founder Member Loan Facility, the Company delivered to the Founder Member a warrant (the “Warrant”) to purchase shares of the Company’s Class A Common Stock. Pursuant to the Warrant, the Founder Member may purchase up to 3,000,000 shares of Class A Common Stock. The number of shares would have been increased to 10,000,000 if, at any time during the term of the Founder Member Facility, Founder Member Loans equal to or greater than $100 million remained outstanding for the three months ended September 30, 2017 and 2016 was approximately $1.4 million and $1.8 million, respectively, and, for the nine months ended September 30, 2017 and 2016, interest expense was approximately $4.8 million and $5.0 million, respectively.

67

Tablea certain period of Contents

SBI Bonds

VFH Parent LLC, Virtu Financial’s wholly owned subsidiary (“VFH”) issued Japanese Yen Bonds (collectively the “SBI Bonds”)time specified in the aggregate principal amountWarrant, however as indicated above, no borrowings were made during the term of ¥3.5 billion to SBI Life Insurance Co., Ltd.the Founder Member Loan Facility and SBI Insurance Co., Ltd., in July 2016. The SBI Bonds were issued bearing interest at the rate per annumtherefore there was no such increase of 4.0% with the scheduled maturity on January 6, 2020.  The rate per annum was increasedshares issuable pursuant to the terms and conditions of the SBI BondsWarrant. The exercise price per share of the Class A Common Stock issuable pursuant to 5.0% asthe Warrant is $22.98, and the Warrant may be exercised to purchase up to 3,000,000 shares of October 27, 2016.the Company's Class A Common Stock on or after May 22, 2020 up to and including January 15, 2022. The aggregate principal balance was ¥3.5 billion (approximately $31.1 million) asWarrant and Class A Common Stock issuable pursuant to the Warrant were offered, and will be issued and sold, in reliance on the exemption from the registration requirements of September 30, 2017.

Credit Facilities

On June 30, 2017, Virtu Financialthe Securities Act, set forth under Section 4(a)(2) of the Securities Act relating to sales by an issuer not involving any public offering.


82
The foregoing descriptions of the Founder Member Loan Facility and VFH entered into a fourth amendedthe Warrant do not purport to be complete and restated credit agreement (the “Fourth Amended and Restated Credit Agreement”) with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, sole lead arranger and bookrunner, which amended and restatedare qualified in its entirety by reference to the existing Credit Agreement.  The Fourth Amendedcomplete text of the Founder Member Loan Facility and Restated the Warrant, which are filed as exhibits to the Company's quarterly report on Form 10-Q for the period ending March 31, 2020, filed with the Securities and Exchange Commission on May 11, 2020.

Credit Agreement provided for a $540.0 million first lien secured term loan, drawn in its entirety on June 30, 2017,

In connection with the ITG Acquisition, Virtu Financial, VFH and continued VFH’s existing $100.0 million first lien senior secured revolving credit facility.  Also on June 30, 2017, the Escrow IssuerAcquisition Borrower entered into the Escrow Credit Agreement, with the lenders party thereto, and JPMorgan Chase Bank, N.A.,Jefferies Finance LLC, as administrative agent whichand Jefferies Finance LLC and RBC Capital Markets, as joint lead arrangers and joint bookrunners.

The Credit Agreement provided for(i) a $610.0 millionsenior secured first lien term loan (the “First Lien Term Loan Facility”) in an aggregate principal amount of $1,500 million, drawn in its entirety on the proceeds of which were deposited into escrow pendingITG Closing Date, with approximately $404.5 million borrowed by VFH to repay all amounts outstanding under the closing ofExisting Term Loan Facility (as defined below) and the Acquisition.

Upon the closing ofremaining approximately $1,095 million borrowed by the Acquisition Borrower to finance the proceedsconsideration and fees and expenses paid in connection with the ITG Acquisition, and (ii) a $50.0 million senior secured first lien revolving facility to VFH (the “First Lien Revolving Facility”), with a $5.0 million letter of credit subfacility and a $5.0 million swingline subfacility. After the Escrow Term Loan were released to fund in part the Acquisition consideration,ITG Closing Date, VFH assumed the obligations of the Escrow IssuerAcquisition Borrower in respect of the Escrow Term Loan were automatically assumed byacquisition term loans.


On October 9, 2019 (the “Amendment No. 1 Closing Date”), VFH Parent andentered into Amendment No. 1 (“Amendment No. 1”), which amended the Escrow Term Loan was deemed to be outstanding under the Fourth Amended and Restated Credit Agreement dated as of March 1, 2019, by and among VFH, Virtu Financial, the Escrow Credit Agreementlenders party thereto, and Jefferies Finance, LLC, as administrative agent and collateral agent, to, among other things, provide for $525.0 million in aggregate principal amount of incremental term loans (the “Incremental Term Loans”), and amend the related credit documents automatically terminatedcollateral agreement. On the Amendment No. 1 Closing Date, VFH borrowed the Incremental Term Loans and were superseded byused the provisionsproceeds together with available cash to redeem all of the Fourth Amended and Restated Credit Agreement,  In addition, the first lien senior secured revolving credit facility under the Fourth Amended and Restated Credit Agreement terminated.

Under the Fourth Amended and Restated Credit Agreement, the $1,150.0$500.0 million aggregate principal amount of the outstanding 6.750% Senior Secured Second Lien Notes (as defined below) due 2022 issued by VFH and Orchestra Co Issuer, Inc., a Delaware corporation and indirect subsidiary of the Company (together with VFH, the “Issuers”), and pay related fees and expenses. The terms, conditions and covenants applicable to the Incremental Term Loans are the same as the terms, conditions and covenants applicable to the existing term loans under the Credit Agreement, including a maturity date of March 1, 2026.


On March 2, 2020 (the “Amendment No. 2 Closing Date”), VFH entered into Amendment No. 2 (“Amendment No. 2”), which further amended the Credit Agreement (as amended by Amendment No. 1 and Amendment No. 2, the “Amended Credit Agreement”) to, among other things, reduce the interest rate spread over adjusted LIBOR or the alternate base rate by 0.50% per annum and eliminated any stepdown in the spread based on VFH's first lien seniorleverage ratio. The term loan borrowings and revolver borrowings under the Amended Credit Agreement bear interest at a per annum rate equal to, at the Company's election, either (i) the greatest of (a) the prime rate in effect, (b) the greater of (1) the federal funds effective rate and (2) the overnight bank funding rate, in each case plus 0.50%, (c) an adjusted LIBOR rate for a Eurodollar borrowing with an interest period of one month plus 1.00% and (d) 1.00%, plus, in each case, 2.00%, or (ii) the greater of (x) an adjusted LIBOR rate for the interest period in effect and (y) 0%, plus, in each case, 3.00%. In addition, a commitment fee accrues at a rate of 0.50% per annum on the average daily unused amount of the First Lien Revolving Facility, with stepdowns to 0.375% and 0.25% per annum based on VFH’s first lien leverage ratio, and is payable quarterly in arrears.

On January 29, 2020, the Company entered into a five-year $1,000 million floating-to-fixed interest rate swap agreement. The Company also previously entered into a five-year $525 million floating-to-fixed interest rate swap agreement in the fourth quarter of 2019. These two interest rate swaps meet the criteria to be considered and were designated as qualifying cash flow hedges under ASC 815 in the first quarter of 2020, and they effectively fix interest payment obligations on $1,000 million and $525.0 million of principal under the First Lien Term Loan Facility at rates of 4.4% and 4.3% through January 2025 and September 2024, respectively, based on the interest rates set forth in the Amended Credit Agreement.

The First Lien Revolving Facility under the Amended Credit Agreement is subject to a springing net first lien leverage ratio which may spring into effect as of the last day of a fiscal quarter if usage of the aggregate revolving commitments exceeds a specified level as of such date. VFH is also subject to contingent principal prepayments based on excess cash flow and certain other triggering events. Borrowings under the Credit Agreement are guaranteed by Virtu Financial and VFH’s material non-regulated domestic restricted subsidiaries and secured by substantially all of the assets of VFH and the guarantors, in each case, subject to certain exceptions.

83
Under the Amended Credit Agreement, term loans  including the Escrow Term Loan, will mature on December 30, 2021 and will require scheduledMarch 1, 2026. The term loans amortize in annual amortization payments on each of the first four anniversaries of the closing of the Acquisition in an amountinstallments equal to the sum of 7.5%1.0% of the original aggregate principal amount of the term loan issued under the Fourthloans. The revolving commitments will terminate on March 1, 2022.

The Amended and Restated Credit Agreement and 7.5% of the aggregate principal amount of the Escrow Term Loan outstanding on the Closing Date.

All obligations under the Term Loan Facility are unconditionally guaranteed by Virtu Financial and the Company’s existing direct and indirect wholly-owned domestic restricted subsidiaries (including, KCG and its wholly-owned domestic restricted subsidiaries), subject to certain exceptions, including exceptions for our broker dealer subsidiaries and certain immaterial subsidiaries. The Term Loan Facility and related guarantees are secured by first-priority perfected liens, subject to certain exceptions, on substantially all of VFH’s and the guarantors’ existing and future assets, including substantially all material personal property and a pledge of the capital stock of VFH, the guarantors (other than Virtu Financial) and the direct domestic subsidiaries of VFH and the guarantors and 100% of the non-voting capital stock and up to 65.0% of the voting capital stock of foreign subsidiaries that are directly owned by VFH or any of the guarantors.

Amounts outstanding under the Fourth Amended and Restated Credit Agreement bear interest as follows:

·

in the case of the term loans, at VFH’s option, at either (a) the greatest of (i) the prime rate in effect, (ii) the NYFRB rate plus 0.50%, (iii) an adjusted LIBOR rate for a Eurodollar borrowing with an interest period of one month plus 1.00%, and (iv) 2.00% plus, in each case, 2.75% per annum; or (b) the greater of (i) an adjusted LIBOR rate for the interest period in effect and (ii) 1.00% plus, in each case, 3.75% per annum; and

·

in the case of revolving loans, at VFH’s option, at either (a) the greatest of (i) the prime rate in effect, (ii) the NYFRB rate plus 0.50%, (iii) an adjusted LIBOR rate for a Eurodollar borrowing with an interest period of one

68

Table of Contents

month plus 1.00%, and (iv) 1.00% plus, in each case, 2.00% per annum; or (b) the greater of (i) an adjusted LIBOR rate for the interest period in effect and (ii) zero plus, in each case, 3.00% per annum.

Under the Fourth Amended and Restated Credit Agreement, we must comply on a quarterly basis with:

·

a maximum total leverage ratio of 5.00 to 1.0 with a step-down to (i) 4.25 to 1.0 from and after the fiscal quarter ending March 31, 2019, (ii) 3.50 to 1.0 from and after the fiscal quarter ending March 31, 2020 and (iii) 3.25 to 1.0 from the fiscal quarter ending March 31, 2021 and thereafter; and

·

a minimum interest coverage ratio of 2.75 to 1.0, stepping up to 3.00 to 1.0 from and after the fiscal quarter ending March 31, 2019.

The Fourth Amended and Restated Credit Agreement contains certain customary affirmative covenants. The negative covenants in the Fourth Amended and Restated Credit Agreement include, among other things, limitations on our ability to do the following, subject to certain exceptions: (i) incur additional debt; (ii) create liens on certain assets; (iii) make certain loans or investments (including acquisitions); (iv) pay dividends on or make distributions in respect of our capital stock or make other restricted junior payments; (v) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; (vi) sell or otherwise dispose of assets, including equity interests in our subsidiaries; (vii) enter into certain transactions with our affiliates; (viii) enter into swaps, forwards and similar agreements; (ix) enter into sale-leaseback transactions; (x) restrict liens and subsidiary dividends; (xi) change our fiscal year; and (xii) modify the terms of certain debt agreements.

The Fourth Amended and Restated Credit Agreement contains certain customary events of default, including relating to a change of control. If an event of default occurs and is continuing, the lenders under the Fourth Amended and Restated Credit Agreement will be entitled to take various actions, including the acceleration of amounts outstanding under the Fourth Amended and Restated Credit Agreement and all actions permitted to be taken by a secured creditor in respect of the collateral securing the obligations under the Fourth Amended and Restated Credit Agreement.

A portion


To finance the Acquisition of certain financing costs incurred in connection with the original credit facility that were scheduled to be amortized over the term of the loan, including original issue discount and underwriting and legal fees, were accelerated at the closing of the refinancing.

Senior Secured Second Lien Notes

On June 16, 2017, the Escrow Issuer and the Co-Issuer completed the offering of $500 million aggregate principal amount of 6.750% Senior Secured Second Lien Notes due 2022. The Notes were issued under an Indenture, as of June 16, 2017 (the “Indenture”), among the Escrow Issuer, the Co-Issuer and U.S. Bank National Association, as the trustee and collateral agent. The Notes matureKCG, on June 15, 2022. Interest on the Notes accrues at 6.750% per annum, payable every six months through maturity on each June 15 and December 15, beginning on December 15, 2017.

On July 20,30, 2017, VFH assumed all of the obligations of the Escrow Issuer under the Indenture and the Notes. The Notes are guaranteed by Virtu Financial and each of Virtu Financial’s wholly-owned domestic restricted subsidiaries that guaranteeVFH previously entered into the Fourth Amended and Restated Credit Agreement including KCG and certain of its subsidiaries andwhich, upon the Escrow Issuer. We refer to VFH and the Co-Issuer together as, the “Issuers.”

The Notes and the related guarantees are secured by second-priority perfected liens on substantially allclosing of the Issuers’ and guarantors’ existing and future assets, subject to certain exceptions, including all material personal property, a pledgeAcquisition of KCG, provided for an aggregate $1.15 billion of first lien secured term loans (the “Existing Term Loan Facility”). As described above, the Existing Term Loan Facility was fully terminated following its repayment in full with the proceeds of the capital stock of the Issuers, the guarantors (other than Virtu Financial) and the direct subsidiaries of the Issuers and the guarantors and up to 65.0% of the voting capital stock of any now-owned or later-acquired foreign subsidiaries that are directly owned by the Issuers or any of the guarantors, which assets will also secure obligationsFirst Lien Term Loan Facility.


We were in compliance with all applicable covenants under the Fourth Amended and Restated Credit Agreement on a first-priority basis.

The Indenture imposes certain limitations on our ability to (i) incur or guarantee additional indebtedness or issue preferred stock; (ii) pay dividends, make certain investments and make repayments on indebtedness that is

as of September 30, 2020.

69

Table of Contents

subordinated in right of payment to the Notes and make other “restricted payments”; (iii) create liens on their assets to secure debt; (iv) enter into transactions with affiliates; (v) merge, consolidate or amalgamate with another company; (vi) transfer and sell assets; and (vii) permit restrictions on the payment of dividends by Virtu Financial’s subsidiaries. The Indenture also contains customary events of default, including, among others, payment defaults related to the failure to pay principal or interest on Notes, covenant defaults, final maturity default or cross-acceleration with respect to material indebtedness and certain bankruptcy events.

Prior to June 15, 2019, we may redeem some or all of the Notes at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest, if any, to (but not including) the date of redemption, plus an applicable “make whole” premium (calculated based upon the yield of certain U.S. treasury securities plus 0.50%).

Prior to June 15, 2019, we may redeem up to 35% of the aggregate principal amount of the Notes at a redemption price equal to 106.750% of the principal amount thereof, plus accrued and unpaid interest, if any, to (but not including) the date of redemption with the net cash proceeds from certain equity offerings.

On or after June 15, 2019, we may redeem some or all of the Notes, at the following redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest to (but not including) the date of redemption, if redeemed during the 12-month period beginning on June 15 of the years indicated below:

 

 

 

 

 

Period

 

 

Percentage

 

2019

 

 

103.375%

 

2020

 

 

101.688%

 

2021 and thereafter

 

 

100.000%

 

Upon the occurrence of specified change of control events as defined in the indenture governing the Notes, we must offer to repurchase the Notes at 101% of the principal amount, plus accrued and unpaid interest, if any, to (but excluding) the purchase date.

Cash Flows


Our main sources of liquidity are cash flow from the operations of our subsidiaries, our broker‑dealer revolvingbroker-dealer credit facilityfacilities (as described above), margin financing provided by our prime brokers and cash on hand.


The table below summarizes our primary sources and uses of cash for the nine months ended September 30, 20172020 and 2016.

2019.

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

(in thousands)

    

2017

    

2016

 

Net cash provided by (used in):

 

 

 

 

 

 

 

Operating activities

 

$

215,771

 

$

187,142

 

Investing activities

 

 

(826,458)

 

 

(53,731)

 

Financing activities

 

 

980,151

 

 

(152,430)

 

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

 

8,300

 

 

1,783

 

Net increase in cash, cash equivalents, and restricted cash

 

$

377,764

 

$

(17,236)

 


Nine Months Ended September 30,
Net cash provided by (used in):20202019
Operating activities$483,598 $(346,222)
Investing activities3,444 (882,820)
Financing activities(598,220)897,810 
Effect of exchange rate changes on cash and cash equivalents3,860 (9,996)
Net increase (decrease) in cash and cash equivalents$(107,318)$(341,228)

Operating Activities


Net cash provided by operating activities was $215.8$483.6 million for the nine months ended September 30, 2017,2020, compared to $187.1net cash used in operating activities of $346.2 million for the nine months ended September 30, 2016.2019. The increase of $28.7 million in net cash provided by operating activities was mainlyprimarily attributable tooperating cash flows resulting from the Acquisition of KCG, offset by the effect of a increases in trading income, net loss for the nine months ended September 30, 2017 which was attributable2020 compared to the factors discussed earlier in this document..

prior period.

70


Table of Contents

Investing Activities


Net cash used inprovided by investing activities was $826.5$3.4 million for the nine months ended September 30, 2017,2020, compared to $53.7net cash used in investing activities of $882.8 million for the nine months ended September 30, 2016.2019. The increase of $772.8 milliondecrease in cash provided by investing activities for the nine months ended September 30, 2020 was primarily attributable to the $799.3$835.6 million cash used for the ITG Acquisition on the ITG Closing Date during the same period of KCG and2019 (see Note 3 “ITG Acquisition” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q), partially offset by $60.6 million cash provided by the $5.7 million acquisitionsale of select strategic telecommunications assets from Teza Technologies.

MATCHNow in the third quarter of 2020 (see Note 4 "Sale of MATCHNow" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q).


Financing Activities


Net cash providedused in financing activities was $980.2$598.2 million for the nine months ended September 30, 2017 and2020, while net cash used inprovided by financing activities was $152.4$897.8 million for the nine months ended September 30, 2016.2019. The increasecash used in financing activities for the nine months ended September 30, 2020 was primarily attributable to a $288.5 million prepayment on our long-term borrowings and by distributions made to noncontrolling interests of $247.8 million. The cash provided by financing activities of $1,132.6 million was primarily attributable to refinancing of our long-term borrowings, which provided an increase in total proceeds of $1,115.0$897.8 million during the nine months endedsame period of 2019 primarily reflects net proceeds from long-term borrowings associated with our entering into the Credit Agreement on the ITG Closing Date, as described above.
84

Secondary Offerings

In May 2018, the Company and certain selling stockholders completed a public offering (the “May 2018 Secondary Offering”) of 17,250,000 shares of Class A Common Stock by the Company and certain selling stockholders at a purchase price per share of $27.16 (the offering price to the public of $28.00 per share minus the underwriters’ discount), which included the exercise in full by the underwriters of their option to purchase additional shares in the May 2018 Secondary Offering.  The Company sold 10,518,750 shares of Class A Common Stock in the offering, the net proceeds of which were used to purchase an equivalent number of Virtu Financial Units and corresponding shares of Class D Common Stock from TJMT Holdings LLC pursuant to that certain Member Purchase Agreement, entered into on May 15, 2018 by and between the Company and TJMT Holdings LLC. The selling stockholders sold 6,731,250 shares of Class A Common Stock in the May 2018 Secondary Offering, including 2,081,250 shares of Class A Common Stock issued by the Company upon the exercise of vested stock options.

In connection with the May 2018 Secondary Offering, the Company, TJMT Holdings LLC, North Island Stockholder, Havelock Fund Investments Pte. Ltd. (“Havelock”) and Aranda entered into that certain Amendment No. 1 to the Amended and Restated Registration Rights Agreement dated April 20, 2017, by and among the Company, TJMT Holdings LLC, the North Island Stockholder, Havelock, Aranda and certain direct or indirect equityholders of the Company (the “Amended and Restated Registration Rights Agreement”) to add Mr. Vincent Viola and Mr. Michael Viola, directors of the Company, and to confirm that certain other persons (including the Company’s CEO) remain parties to the Amended and Restated Registration Rights Agreement.

In May 2019, the Company completed a public offering (the “May 2019 Secondary Offering”) of 9,000,000 shares of Class A Common Stock at a purchase price per share paid by the underwriters of $22.00, the net proceeds of which were used to purchase an equivalent number of Virtu Financial Units and corresponding shares of Class D Common Stock from TJMT Holdings LLC pursuant to that certain Member Purchase Agreement, entered into on May 14, 2019 by and between the Company and TJMT Holdings LLC.

Off-Balance Sheet Arrangements

As of September 30, 2017.

Off-Balance Sheet Arrangements

We do2020, we did not invest inhave any off-balance sheet vehiclesarrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that providehave or are reasonably likely to have current or future effects on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources market or credit risk support, or engage in any activities that expose usare material to any liability that is not reflected in our condensed consolidated financial statements.

investors.


Inflation


We believe inflation has not had a material effect on our financial condition as of September 30, 2020, and December 31, 2019, or on our results of operations or inand cash flows for the three months ended September 30, 2017 and 2016 and for the nine months ended September 30, 20172020 and 2016.

2019.


Critical Accounting Policies and Estimates


The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the applicable reporting period. Critical accounting policies are those that are the most important portrayal of our financial condition, and results of operations and cash flows, and that require our most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are described in more detail in the notes to our condensed consolidated financial statements, our most critical accounting policies are discussed below. In applying such policies, we must use some amounts that are based upon our informed judgments and best estimates. Estimates, by their nature, are based upon judgments and available information. The estimates that we make are based upon historical factors, current circumstances and the experience and judgment of management. We evaluate our assumptions and estimates on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

Earnings Per Share

Earnings per share (“EPS”) is calculated on both a basic and diluted basis. Basic EPS excludes dilution and is calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated by dividing the net income (loss) available for common stockholders by the diluted weighted average shares outstanding for that period. Diluted EPS includes the determinants of the basic EPS and, in addition, reflects the dilutive effect of shares of common stock estimated to be distributed in the future under our share based compensation plans, with no adjustments to net income (loss) available for common stockholders for dilutive potential common shares.

We grant restricted stock units (“RSUs”), which entitle recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. As a result, the unvested RSUs meet the definition of a participating security requiring the application of the two-class method. Under the two-class

71


85

method, earnings available to common shareholders, including both distributed and undistributed, are allocated to each class of common stock and participating securities according to dividends declared and participating rights in undistributed earnings, which may cause diluted EPS to be more dilutive than the calculation using the treasury stock method.

Principles of Consolidation, including Noncontrolling Interests

The condensed consolidated financial statements include the accounts of us and our majority and wholly owned subsidiaries. As sole managing member of Virtu Financial, we exert control over the Group’s operations. In accordance with ASC 810, Consolidation, we consolidate Virtu Financial and its subsidiaries’ consolidated financial statements and record the interests in Virtu Financial that we do not own as noncontrolling interests.All intercompany accounts and transactions have been eliminated in consolidation. In July 2016, we made a minority investment in a proprietary trading system. We elected the fair value option to account for an equity investment because we believe that fair value is the most relevant measurement attribute for the investment, as well as to reduce operational and accounting complexity.

Valuation of Financial Instruments


Due to the nature of our operations, substantially all of our financial instrument assets, comprised of financial instruments owned, securities purchased under agreements to resell, and receivables from brokers, dealers and clearing organizations are carried at fair value based on published market prices and are marked to market daily, or are assets which are short-term in nature and are reflected at amounts approximating fair value. Similarly, all of our financial instrument liabilities that arise from financial instruments sold but not yet purchased, securities sold under agreements to repurchase, securities loaned, and payables to brokers, dealers and clearing organizations are short-term in nature and are reported at quoted market prices or at amounts approximating fair value.


Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories based on inputs:

Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 — Quoted prices in markets that are not active and financial instruments for which all significant inputs are observable, either directly or indirectly; or

Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable

The fair values for substantially all of our financial instruments owned and financial instruments sold but not yet purchased are based on observable prices and inputs and are classified in levels 1 and 2 of the fair value hierarchy. Instruments categorized within level 3 of the fair value hierarchy are those which require one or more significant inputs that are not observable. Estimating the fair value of level 3 financial instruments requires judgments to be made. See Note 11 “Financial Assets and Liabilities” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for further information about fair value measurements.

Revenue Recognition


Trading Income, Net


Trading income, net, consists of trading gains and losses that are recorded on a trade date basis and reported on a net basis. Trading income, net, is comprised of changes in fair value of financial instruments owned and financial instruments sold, not yet purchased assets and liabilities (i.e., unrealized gains and losses) and realized gains and losses on equities, fixed income securities, currencies and commodities.


Interest and Dividends Income/Interest and Dividends Expense


Interest income and interest expense are accrued in accordance with contractual rates. Interest income consists of income earned on collateralized financing arrangements and on cash held by brokers. Interest expense includes interest expense from collateralized transactions, margin and related short-term lending facilities. Dividends are recorded on the ex-dividend date, and interest is recognized on an accrual basis.


Commissions, net

and Technology Services


Commissions, net, which primarily comprise commissions and commission equivalents earned on institutional client orders, are recorded on a trade date basis.basis, which is the point at which the performance obligation to the customer is satisfied. Under a commission management program, the Company allowswe allow institutional clients to allocate a portion of their gross commissions to pay for research and other services provided by third parties. As the Company actswe act as an agent in these transactions, it recordswe record such expenses on a net basis within Commissions, net and technology services in the condensed consolidated statementsCondensed Consolidated Statements of comprehensive income.

Technology Services

Comprehensive Income. The Company recognizes the related revenue when the third-party research services are rendered and payments are made to the service provider.


Technology services revenues consist of fees paid by third parties for licensing of our proprietary risk management and trading infrastructure technology and provision of associated management and hosting services. These fees include both upfront and annual recurring fees. Income from existing arrangements for technology services is recordedfees, as a services contractwell as, in accordance with SEC Topic 13 (Staff Accounting Bulletin No. 104), SEC Topic 13.A.3 (f), with revenue being recognized once persuasive evidence of an arrangement exists, delivery has occurred, the fee is

72

certain cases, contingent fees based on client revenues, which represents variable

86

consideration. The services offered under these contracts have the same pattern of transfer; accordingly, they are being measured and recognized as a single performance obligation. The performance obligation is satisfied over time, and accordingly, revenue is recognized as time passes. Variable consideration has not been included in the transaction price as the amount of consideration is contingent on factors outside the Company’s control and thus it is not probable that a significant reversal of cumulative revenue recognized will not occur. Recurring fees, which exclude variable consideration, are billed and collected on a monthly basis.


Workflow technology revenues consist of order and trade execution management and order routing services we provide through our front-end workflow solutions and network capabilities.

We provide trade order routing from our execution management system (“EMS”) to our execution services offerings, with each trade order routed through the EMS representing a separate performance obligation that is satisfied at a point in time. A portion of the commissions earned on the trade is then allocated to Workflow Technology based on the stand-alone selling price paid by third-party brokers for order routing. The remaining commission is allocated to commissions, net using a residual allocation approach. Commissions earned are fixed or determinable, and collectabilityrevenue is probable. Technologyrecognized on the trade date.

We participate in commission share arrangements, where trade orders are routed to third-party brokers from our EMS and our order management system (“OMS”). Commission share revenues from third-party brokers are generally fixed and revenue is recognized at a point in time on the trade date.

We also provide OMS and related software products and connectivity services to customers and recognize license fee revenues also include agency commission fees thatand monthly connectivity fees. License fee revenues, generated for the use of our OMS and other software products, are fixed and recognized at the point in time at which the customer is able to use and benefit from the license. Connectivity revenue is variable in nature, based on the number of live connections, and is recognized over time on a monthly basis using a time-based measure of progress.

Analytics revenues are earned from agency trades executed by the Company on behalf of third parties.

Software Development Costs

providing customers with analytics products and services, including trading and portfolio analytics tools. We accountprovide analytics products and services to customers and recognize subscription fees, which are fixed for the costscontract term, based on when the products and services are delivered. Analytics services can be delivered either over time (when customers are provided with distinct ongoing access to analytics data) or at a point in time (when reports are only delivered to the customer on a periodic basis). Over time performance obligations are recognized using a time-based measure of computer software developedprogress on a monthly basis, since the analytics products and services are continually provided to the client. Point in time performance obligations are recognized when the analytics reports are delivered to the client.


Analytics products and services can also be paid for through variable bundled arrangements with trade execution services. Customers agree to pay for analytics products and services with commissions generated from trade execution services, and commissions are allocated to the analytics performance obligation(s) using:
(i)the commission value for each customer for the products and services it receives, which is priced using the value for similar stand-alone subscription arrangements; and
(ii)a calculated ratio of the commission value for the products and services relative to the total amount of commissions generated from the customer.

For these bundled commission arrangements, the allocated commissions to each analytics performance obligation are then recognized as revenue when the analytics product is delivered, either over time or obtained for internal useat a point in accordance with ASC 350-40, Internal-Use Software. We capitalize payroll and payroll related costs for employees incurred in developing internal-use software. Costs incurred during the preliminary project and post-implementation stages are charged to expense. Management’s judgment is required in determining the point when various projects enter the stages at which coststime. These allocated commissions may be capitalized, in assessingdeferred if the ongoing value ofallocated amount exceeds the capitalized costs and in determining the estimated useful lives over which the costs are amortized. Capitalization of such costs begins when a program or functionality under development has established technological feasibility and ends when the resulting program or functionality is available for release to users. Such criteria are measured through periodic surveys of employees responsible for developing internal-use software.

Capitalized software development costs and related accumulated amortization are included in property, equipment and capitalized software in the accompanying condensed consolidated statements of financial condition and are amortized over a period of 1.4 to 3 years, which represents the estimated useful lives of the underlying software.

amount recognizable based on delivery.


Share-Based Compensation


We account for share-based compensation transactions with employees under the provisions of ASCthe Financial Accounting Standards Board's Accounting Standards Codification (“ASC”) 718, Compensation: Stock Compensation. Share-based compensation transactions with employees are measured based on the fair value of equity instruments issued.

The fair value of awards issued for compensation prior to the Reorganization Transactions and the IPO was determined by management, with the assistance of an independent third party valuation firm, using a projected annual forfeiture rate, where applicable, on the date of grant.


Share-based awards issued for compensation in connection with or subsequent to the Reorganization Transactions and the IPO pursuant to our Amended and Restated 2015 Management Incentive Plan, (the “2015 Management Incentive Plan”)and assumed pursuant to the Amended and Restated ITG 2007 Equity Plan, were in the form of stock options, Class A commonCommon Stock, restricted stock awards ("RSAs") and restricted stock units.units ("RSUs"). The fair value of the stock option grants is determined through the application of the Black-Scholes-Merton model. The fair value of the Class A common stockCommon Stock and restricted stock units is determined based on the volume weighted average price for the three days preceding the grant, and withgrant. With respect to the restricted stock units, a projected annual forfeiture rate.RSUs, we account for forfeitures as
87
they occur. The fair value of RSAs is determined based on the closing price as of the date of grant. The fair value of share-based awards granted to employees is expensed based on the vesting conditions and is recognized on a straight-line basis over the vesting period, or, in the case of RSAs subject to performance conditions, from the date that achievement becomes probable through the remainder of the vesting period. We record as treasury stock shares repurchased from employees for the purpose of settling tax liabilities incurred upon the issuance of common stock, the vesting of restricted stock units or the exercise of stock options.


Income Taxes


We conduct our business globally through a number of separate legal entities. Consequently, our effective tax rate is dependent upon the geographic distribution of our earnings or losses and the tax laws and regulations of each legal jurisdiction in which we operate.


Certain of our wholly owned subsidiaries are subject to income taxes in foreign jurisdictions. The provision for (benefit from) income tax is comprised of current tax and deferred tax. Current tax represents the tax on current year tax returns, using tax rates enacted at the balance sheet date. A deferred tax asset is recognized only to the extent that it is probable that future taxable income will be available against which the asset can be utilized.


We are currently subject to audit in various jurisdictions, and these jurisdictions may assess additional income tax liabilities against us. Developments in an audit, litigation, or the relevant laws, regulations, administrative practices, principles, and interpretations could have a material effect on our operating results or cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods. We recognize the tax benefit from an uncertain tax position in accordance with ASC 740, Income Taxes, only if it is more likely than not that the tax position will be sustained on examination by the applicable taxing authority, including resolution of the appeals or litigation processes, based on the technical merits of the position. The tax benefits recognized in the condensed consolidated financial statements from such a position are measured based on the largest

73

Table of Contents

benefit for each such position that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Many factors are considered when evaluating and estimating the tax positions and tax benefits. Such estimates involve interpretations of regulations, rulings, case law, etc. and are inherently complex. Our estimates may require periodic adjustments and may not accurately anticipate actual outcomes as resolution of income tax treatments in individual jurisdictions typically would not be known for several years after completion of any fiscal year.


Goodwill and Intangible Assets


Goodwill represents the excess of the purchase price over the underlying net tangible and intangible assets of our acquisitions. Goodwill is not amortized but is testedassessed for impairment on an annual basis and between annual testsassessments whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is testedassessed at the reporting unit level, which is defined as an operating segment or one level below the operating segment. Prior to the Acquisition, we managed and operated as one business, and accordingly, operated under one reportable segment.  As a result of the acquisition of KCG, beginning in the third quarter of 2017, we have three operating segments: (i) Market Making; (ii)  Execution Services; and (iii) Corporate. We allocate goodwill to the new reporting units using a relative fair value approach. In addition, we

When assessing impairment, an entity may perform an initial qualitative assessment, of potential goodwill impairment for all reporting units immediately priorunder which it assesses qualitative factors to the reallocation and determineddetermine whether it is more likely than not that no impairment was indicated.

The goodwill impairment test is a two-step process. The first step is used to identify potential impairment and compares the fair value of a reporting unit withis less than its carrying amount, including goodwill. IfIn evaluating whether it is more likely than not that the carrying amountfair value of a reporting unit exceedsis less than its carrying amount, an entity shall assess relevant events and circumstances, including the following:

•general economic conditions;
•limitations on accessing capital;
•fluctuations in foreign exchange rates or other developments in equity and credit markets;
•industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development;
•cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows;
•overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods;
•other relevant entity-specific events such as changes in management, key personnel, strategy, or customers, contemplation of bankruptcy, or litigation.

If, after assessing the totality of such events or circumstances, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further goodwill impairment testing is necessary.
88

If further testing is necessary, the fair value of the reporting unit is compared to its carrying value; if the fair value of the reporting unit is less than its carrying value, a goodwill impairment loss is recorded, equal to the excess of the reporting unit’s carrying amount over its fair value (not to exceed the second step of thetotal goodwill impairment test must be performed. The second step is used to measure the amount of impairment loss, if any, and compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss must be recognized in an amount equalallocated to that excess.

reporting unit).


We testassess goodwill for impairment on an annual basis onas of July 11st and on an interim basis when certain events or circumstances exist. In the impairment testassessment as of July 1, 2017, the primary valuation method used2020, we performed a qualitative assessment as described above for each reporting unit. No impairment of goodwill was identified.

We amortize finite-lived intangible assets over their estimated useful lives. We test finite-lived intangible assets for impairment when impairment indicators are present, and if impaired, they are written down to estimate the fair value of the reporting unit was the market capitalization approach based on the market price of our Class A common stock, which the management believes to be an appropriate indicator of its fair value.


Recent Accounting Pronouncements


For a discussion of recently issued accounting developments and their impact or potential impact on our condensed consolidated financial statements, see Note 2 – Summary“Summary of Significant Accounting Policies,Policies” of the condensed consolidated financial statements included inPart I Item 1 “Financial Statements” of this quarterly reportQuarterly Report on Form 10-Q.


89
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Market Risk

We are exposed to various market risks in the ordinary course of business. The risks primarily relate to changes in the value of financial instruments due to factors such as market prices, interest rates, and currency rates.


Our on-exchange market making activities are not dependent on the direction of any particular market and are designed to minimize capital at risk at any given time by limiting the notional size of our positions. Our on-exchange market making strategies involve continuously quoting two-sided markets in various financial instruments with the intention of profiting by capturing the spread between the bid and offer price. If another market participant executes against the strategy’s bid or offer by crossing the spread, the strategy will instantaneously attempt to lock in a return by either exiting the position or hedging in one or more different correlated instruments that represent economically equivalent value to the primary instrument. Such primary or hedging instruments include but are not limited to securities and derivatives such as: common shares, exchange traded products, American Depositary Receipts (“ADRs”), options, bonds, futures, spot currencies and commodities. Substantially all of the financial instruments we trade are liquid and can be liquidated within a short time frame at low costs.

cost.


Our customer market making activities involve the taking of position risks. The risks at any point in time are limited by the notional size of positions as well as other factors. The overall portfolio risks are quantified using internal risk models and monitored by the Company's Chief Risk Officer, the independent risk group and senior management.

We use various proprietary risk management tools in managing our market risk on a continuous basis (including intraday). In order to minimize the likelihood of unintended activities by our market making strategies, if our risk

74

Table of Contents

management system detects a trading strategy generating revenues outside of our preset limits, it will freeze, or “lockdown”, that strategy and alert risk management personnel and management.

Market risk was elevated during the period, largely as a result of the COVID-19 pandemic and the governmental and other responses thereto.


For working capital purposes, we invest in money market funds and maintain interest and non-interest bearing balances at banks and in our trading accounts with clearing brokers, which are classified as Cash and cash equivalents and Receivables from broker-dealers and clearing organizations, respectively, on the Condensed Consolidated Statements of Financial Condition. These financial instruments do not have maturity dates; the balances are short term, which helps to mitigate our market risks. We also invest our working capital in short-term U.S. government securities, which are included in Financial instruments owned on the Condensed Consolidated Statements of Financial Condition. Our cash and cash equivalents held in foreign currencies are subject to the exposure of foreign currency fluctuations. These balances are monitored daily and are hedged or reduced when appropriate and therefore not material to our overall cash position.

In the normal course of business, we maintain inventories of exchange-listed and other equity securities, and to a lesser extent, fixed income securities and listed equity options. The fair value of these financial instruments at September 30, 2020 and December 31, 2019 was $2.8 billion and $2.8 billion, respectively, in long positions and $2.8 billion and $2.5 billion, respectively, in short positions. We also enter into futures contracts, which are recorded on our Condensed Consolidated Statements of Financial Condition within Receivable from brokers, dealers and clearing organizations or Payable to brokers, dealers and clearing organizations as applicable.

We calculate daily the potential losses that might arise from a series of different stress events. These include both single factor and multi factor shocks to asset prices based off both historical events and hypothetical scenarios. The stress calculations include a full recalculation of any option positions, non-linear positions and leverage. Senior management and the independent risk group carefully monitor the highest stress scenarios to help mitigate the risk of exposure to extreme events.

The purchase and sale of futures contracts requires margin deposits with a Futures Commission Merchant (“FCM”). The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM’s proprietary activities. A customer’s cash and other equity deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery may be limited to the Company’s pro rata share of segregated customer funds available. It is possible that the recovery amount could be less than the total cash and other equity deposited.

90
Interest Rate Risk, Derivative Instruments


In the normal course of business, we utilize derivative financial instruments in connection with our proprietary trading activities. We do not designatecarry our derivative financial instruments as hedging instruments under Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (ASC) 815 Derivatives and Hedging. Instead, we carry ourtrading derivative instruments at fair value with gains and losses included in tradingTrading income, net, in the accompanying condensed statementsCondensed Consolidated Statements of comprehensive income (loss).Comprehensive Income. Fair value of derivatives that are freely tradable and listed on a national exchange is determined at their last sale price as of the last business day of the period. Since gains and losses are included in earnings, we have elected not to separately disclose gains and losses on derivative instruments, but instead to disclose gains and losses within trading revenue for both derivative and non-derivative instruments.


We also use derivative instruments for risk management purposes, including cash flow hedges used to manage interest rate risk on long-term borrowings and net investment hedges used to manage foreign exchange risk. We have entered into floating-to-fixed interest rate swap agreements in order to manage interest rate risk associated with our long-term debt obligations. Additionally, we may seek to reduce the impact of fluctuations in foreign exchange rates on our net investment in certain non-U.S. operations through the use of foreign currency forward contracts. For interest rate swap agreements and foreign currency forward contracts designated as hedges, we assess our risk management objectives and strategy, including identification of the hedging instrument, the hedged item and the risk exposure and how effectiveness is to be assessed prospectively and retrospectively. The effectiveness of the hedge is assessed based on the overall changes in the fair value of the interest rate swaps or forward contracts. For instruments that meet the criteria to be considered hedging instruments under ASC 815, any gains or losses, to the extent effective, are included in Accumulated other comprehensive income on the Condensed Consolidated Statements of Financial Condition and Other comprehensive income on the Condensed Consolidated Statements of Comprehensive Income. The ineffective portion, if any, is recorded in Other, net on the Condensed Consolidated Statements of Comprehensive Income.

Futures Contracts. Contracts. As part of our proprietary market making trading strategies, we use futures contracts to gain exposure to changes in values of various indices, commodities, interest rates or foreign currencies. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. Upon entering into a futures contract, we are required to pledge to the broker an amount of cash, U.S. government securities or other assets equal to a certain percentage of the contract amount. Subsequent payments, known as variation margin, are made or received by us each day, depending on the daily fluctuations in the fair values of the underlying securities. We recognize a gain or loss equal to the daily variation margin.


Due from Broker DealersBroker-Dealers and Clearing Organizations. Organizations. Management periodically evaluates our counterparty credit exposures to various brokers and clearing organizations with a view to limiting potential losses resulting from counterparty insolvency.


Foreign Currency Risk


As a result of our international market making and execution services activities and accumulated earnings in our foreign subsidiaries, our income and net worth are subject to fluctuation in foreign exchange rates. While we generate revenues in several currencies, athe majority of our operating expenses are denominated in U.S. dollars. Therefore, depreciation in these other currencies against the U.S. dollar would negatively impact revenue upon translation to the U.S. dollar. The impact of any translation of our foreign denominated earnings to the U.S. dollar is mitigated, however, through the impact of daily hedging practices that are employed by the company.


Approximately 26.1% and 27.3% of our revenues for the three months ended September 30, 2020 and 2019, respectively, and approximately 20.2% and 25.1% of our total revenues for the nine months ended September 30, 2020 and 2019, respectively, were denominated in non-U.S. Dollar currencies. We estimate that a hypothetical 10% adverse change in the value of the U.S. dollar relative to our foreign denominated earnings would have resulted in decreases in revenues of $17.2 million and $10.4 million for the three months ended September 30, 2020 and 2019, respectively, and $51.7 million and $28.1 million for the nine months ended September 30, 2020 and 2019, respectively.

Assets and liabilities of subsidiaries with non-U.S. dollar functional currencies are translated into U.S. dollars at period-end exchange rates. Income, expense and cash flow items are translated at average exchange rates prevailing during the period. The resulting currency translation adjustments are recorded as foreign exchange translation adjustment in our condensed consolidated statementsCondensed Consolidated Statements of comprehensive income (loss)Comprehensive Income and changesCondensed Consolidated Statements of Changes in equity.Equity. Our primary currency translation exposures historically relate to net investments in subsidiaries having functional currencies denominated in the Euro.

Market Risk

Our market making activities are not dependent on the direction of any particular marketEuro, Pound Sterling, and are designed to minimize capital at risk at any given time by limiting the notional size of our positions. Our strategies involve continuously quoting two-sided markets in various financial instruments with the intention of profiting by capturing the spread between the bid and offer price. If another market participant executes against the strategy’s bid or offer by crossing the spread, the strategy will instantaneously attempt to lock in a return by either exiting the position or hedging in one or more different correlated instruments that represent economically equivalent value to the primary instrument. Such primary or hedging instruments include but are not limited to securities and derivatives such as: common shares, exchange traded products, American Depositary Receipts (“ADRs”), options, bonds, futures, spot currencies and

Canadian dollar.


75

91

Table of Contents

commodities. Substantially all of the financial instruments we trade are liquid and can be liquidated within a short time frame at low costs.

For working capital purposes, we invest in money market funds and maintain interest and non-interest bearing balances at banks and in our trading accounts with clearing brokers, which are classified as Cash and cash equivalents and Receivable from brokers, dealers and clearing organizations, respectively, on the condensed consolidated statements of financial condition. These financial instruments do not have maturity dates; the balances are short term, which helps to mitigate our market risks. We also invest our working capital in short-term U.S. government securities, which are included in Financial instruments owned on the condensed consolidated statements of financial condition.  Our cash and cash equivalents held in foreign currencies are subject to the exposure of foreign currency fluctuations. These balances are monitored daily and are hedged or reduced when appropriate and therefore not material to our overall cash position.

We use various proprietary risk management tools in managing our market risk on a continuous basis (including intraday). In order to minimize the likelihood of unintended activities by our market making strategies, if our risk management system detects a trading strategy generating revenues outside of our preset limits, it will freeze, or “lockdown”, that strategy and alert risk management personnel and management.

In the normal course of business, we maintain inventories of exchange-listed and other equity securities, and to a lesser extent, fixed income securities and listed equity options. The fair value of these financial instruments at September 30, 2017 and December 31, 2016 was $3.00 billion and $1.83 billion, respectively, in long positions and $2.54 billion and $1.35 billion, respectively, in short positions. We also enter into futures contracts, which are recorded on our condensed consolidated statements of financial condition within Receivable from brokers, dealers and clearing organizations or Payable to brokers, dealers and clearing organizations as applicable.

We calculate daily the potential losses that might arise from a series of different stress events. These include both single factor and multi factor shocks to asset prices based off both historical events and hypothetical scenarios. The stress calculations include a full recalculation of any option positions, non-linear positions and leverage. Senior management and the independent risk function carefully monitor the highest stress scenarios to ensure that the Company is not unduly exposed to any extreme events.

The potential change in fair value is estimated to be a gain of $6.5 million using a hypothetical 10% increase in equity prices as of September 30, 2017, and an estimated loss of $9.5 million using a hypothetical 10% decrease in equity prices at September 30, 2017. These estimates take into account the offsetting effect of such hypothetical price movements on the fair value of short positions against long positions, the effect on the fair value of options, futures, nonlinear positions and leverage as well as assumed correlations with non-equity asset classes, such as fixed income, commodities and foreign exchange. The Company relies on internally developed systems in order to model and calculate stress risks to a variety of different scenarios.

The purchase and sale of futures contracts requires margin deposits with a Futures Commission Merchant (“FCM”). The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM’s proprietary activities. A customer’s cash and other equity deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery may be limited to the Company’s pro rata share of segregated customer funds available. It is possible that the recovery amount could be less than the total cash and other equity deposited.

Financial Instruments with Off Balance Sheet Risk


We enter into various transactions involving derivatives and other off-balance sheet financial instruments. These financial instruments include futures, forward contracts, swaps, and exchange-traded options. These derivative financial instruments are used to conduct trading activities and manage market risks and are, therefore, subject to varying degrees of market and credit risk. Derivative transactions are entered into for trading purposes or to economically hedge other positions or transactions.

76


Table of Contents

Futures and forward contracts provide for delayed delivery of the underlying instrument. In situations where we write listed options, we receive a premium in exchange for giving the buyer the right to buy or sell the security at a future date at a contracted price. The contractual or notional amounts related to these financial instruments reflect the volume and activity and do not necessarily reflect the amounts at risk. Futures contracts are executed on an exchange, and cash settlement is made on a daily basis for market movements, typically with a central clearing house as the counterparty. Accordingly, futures contracts generally do not have credit risk. The credit risk for forward contracts, options, and swaps is limited to the unrealized market valuation gains recorded in the statementsCondensed Consolidated Statements of financial condition.Financial Condition. Market risk is substantially dependent upon the value of the underlying financial instruments and is affected by market forces, such as volatility and changes in interest and foreign exchange rates.


ITEM 4. CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures


Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2017.2020. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2017,2020, our disclosure controls and procedures were effective to ensure information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the Securities and Exchange Commission’sSEC’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.


Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls.


The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.


Changes to Internal Control over Financial Reporting


No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the three months ended September 30, 20172020 that has or is reasonably likely to materially affect, our internal control over financial reporting.

92
PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS


The information required by this item is set forth in the “Litigation”“Legal Proceedings” section in Note 1315 “Commitments, Contingencies and Guarantees” to the Company’s Condensed Consolidated Financial Statementscondensed consolidated financial statements included in Part I Item 1 “Financial Information”Statements”, which is incorporated by reference herein.

77


Table of Contents

ITEM 1A. RISK FACTORS

We are updating our risk factors


There have been no material changes to include the additional risk factors presented below. The additional risk factors presented below and the other information set forth in this quarterly report on Form 10-Q should be read in conjunction with the other risk factors set forth in our Annual Report for the year ended December 31, 2016 on Form 10-K, in each case which should be carefully considered. The risks and uncertainties presented in this quarterly report on Form 10-Q and in our Annual Report for the year ended December 31, 2016 on Form 10-K (collectively, the “Risk Factors”) are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also materially and adversely affect our business, financial condition and/or operating results. Please see page 49 of this quarterly report on Form 10-Q for a discussion of the forward-looking statements that are qualified by the Risk Factors. If any of the events or circumstances described in the Risk Factors actually occurs,described in Part I Item 1A. “Risk Factors” in our business, operating results and financial condition could be materially adversely affected.

Risks Related to2019 Form 10-K, except for the Business

KCG’s market making business is concentrated in U.S. equities; accordingly, our operating results may be negatively impacted by changes that affect the U.S. equity markets.

Approximately 85% of KCG’s market making revenues for 2016 were derived from its market making in U.S. equities. following:


The level of activity in the U.S. equity markets is directly affected by factors beyond our control, including U.S. economic and political conditions, broad trends in business and finance, legislative and regulatory changes and changes in volume and price levels of U.S. equity transactions. As a result, to the extent these or other factors reduce trading volume or volatility or result in a downturn in the U.S. equity markets, KCG may experience a material adverse effect on its or, after the consummationeffects of the Acquisition, our business, financial condition and operating results.

We could lose significant sources of revenues if we lose any of KCG’s larger clients.

At times, a limited number of clients could account for a significant portion of KCG’s order flow, revenues

and profitability, and we expect a large portionoutbreak of the future demand for,novel coronavirus (COVID-19) have negatively affected the global economy, the United States economy and profitability from, its trade execution services to remain concentrated within a limited number of clients. The loss of one or more larger clientsthe global financial markets, and may disrupt our operations and our clients' operations, which could have an adverse effect on our revenues and profitability in the future. None of these clients is currently contractually obligated to utilize us for trade execution services and, accordingly, these clients may direct their trade execution activities to other execution providers or market centers at any time. Some of these clients have grown organically or acquired market makers and specialist firms to internalize order flow or will have entered into strategic relationships with competitors. There can be no assurance that we will be able to retain these significant clients or that such clients will maintain or increase their demand for our trade execution services. Further, the continued integration of legacy systems and the development of new systems could result in disruptions to our ongoing businesses and relationships or cause issues with standards, controls, procedures and policies that adversely affect our ability to maintain relationships with customers, or to solicit new customers. The loss, or a significant reduction, of demand for our services from any of these clients could have a material adverse effect on our business, financial condition and results of operations.

We will incur risks


The ongoing COVID-19 global and national health emergency has caused significant disruption in connection with migrationthe international and United States economies and financial markets. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of KCG’s data center.

We are planningCOVID-19 has caused, among other matters, illness, death, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The United States now has the world’s most reported COVID-19 cases, and all 50 states and the District of Columbia have reported cases of infected individuals. Similar impacts have been experienced in every country in which we do business. The full impact this virus may have on the global financial markets and the overall economy is not currently known. Impacts to migrate KCG’s Jersey City data center operations to other commercial data centersour business could be widespread and

colocations by global, and material impacts may be possible, including the end of April 2018 and there arefollowing:


•Employees, including our senior executives, contracting COVID-19;
•Reductions in our operating effectiveness or efficiency as a significant number of risks involved that could haveour employees currently work from home and potential disruptions or adverse impacts as and when we implement a return to work policy for certain employees;
•Unprecedented volatility in global financial markets, which may increase the risk or potential negative impact on our operations. These risks include,magnitude of operational errors;
•Increases in liquidity needs, including but are not limited to missing project timelines (which could havemargin funding requirements with clearinghouses or prime brokers, for our business and challenges obtaining sufficient liquidity sources to meet such needs or requirements;
•Adverse impacts on our clients, counterparties, vendors and other business partners on whom we rely for order flow, funding, and critical technological or operational services and the potential for disruptionincrease in risk of market makingcounterparty default or trading servicesinsolvency event;
•Closures of our offices or other operations), risks relatedthe offices of our clients; and
•Travel restrictions limiting our ability to changescollaborate internally and engage with current and potential clients and counterparties externally.

We are taking precautions to technology,protect the safety and unexpected costs associated withwell-being of our employees, customers and business partners. However, we cannot be certain that the migration. The diversion of business, technology and management attention from other business concerns and a multitude of external factors also pose a risk. Whilesteps we employ a significant amount of internal and external resources to mitigate these and other risks associated with the migration, they could have an adverse impact on our business, financial conditiontaken or results of operations.

78

Table of Contents

Certain additional paymentswill take will be deemed to be madeadequate or appropriate, nor can we predict the level of disruption which will occur to us in connection with the sale of by KCG of KCG Hotspot are uncertain.

our employee's ability to perform their functions.


The sale of KCG Hotspot, KCG’s institutional spot foreign exchange electronic communications network, in

2015 was structured as a taxable asset sale and BATS Global Markets, Inc. (“Bats”), the purchaser, and KCG have agreed to share certain related tax benefits that potentially accrue to Bats after the closingfurther spread of the transaction. KCG will share in 70% of the actual tax benefits to Bats for the first three years after the closingCOVID-19 outbreak may materially disrupt financial activity generally and 50% of the actual tax benefits thereafter (the “Annual Tax Benefits”). However, KCG has a one-time option exercisable within 30 days of the third anniversary of the closing of the transaction to terminate the continued tax sharing arrangement in exchange for a one-time payment of $50 million, which Bats has the right to exercise after KCG’s option expires.

On September 26, 2016, Bats entered into an agreement and plan of merger with CBOE Holdings, Inc. (“CBOE”) and certain newly formed subsidiaries thereof, pursuant to which Bats merged into a subsidiary of CBOE, with such subsidiary surviving the merger (the “Bats Merger”). The receipt of the Annual Tax Benefits by KCG is subject to CBOE having sufficient net income to receive the tax benefits. The net income of CBOE could decrease due to numerous factors, which are outside of the control of KCG. In addition, any decrease in the corporate tax rates applicable to CBOEareas in which we operate. This could reduce the size or certainty of the Annual Tax Benefits (but will not have an impact on the $50 million one-time payment described above).

We have substantial amount of indebtedness,result in a decline in demand for our products and services, which couldwould negatively impact our business and financial condition,liquidity position and our debt agreements contain restrictions that will limit our flexibility in operating our business.

After the Acquisition of KCG, we are a highly leveraged company. As of September 30, 2017, we have approximately $1,481.1 million principal amount of outstanding long-term indebtedness. Additionally, we are party to  the $125.0 Uncommitted Facility under which we had $15.0 million of borrowings outstanding at September30, 2017 Also, certain of our non-guarantor subsidiaries are party to various short-term credit facilities with various prime brokers and other financial institutions in an aggregate amount of $543.0 million under which we had $159.1 million in borrowings outstanding at September 30, 2017.

The Fourth Amended and Restated Credit Agreement, the indenture governing the Notes and any other existingresults. Any one or future indebtedness of ours contain a number of covenants that impose significant operating and financial restrictions on us, including restrictions on the Issuers’ and its restricted subsidiaries ability to, among other things:

·

incur additional debt, guarantee indebtedness or issue certain preferred equity interests;

·

pay dividends on or make distributions in respect of, or repurchase or redeem, our equity interests or make other restricted payments;

·

prepay, redeem or repurchase certain debt;

·

make loans or certain investments;

·

sell certain assets;

·

create liens on certain assets;

·

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

·

enter into certain transactions with our affiliates;

·

enter into agreements restricting our subsidiaries’ ability to pay dividends; and

·

designate our subsidiaries as unrestricted subsidiaries.

As a resultmore of these covenants, we are limited in the manner in which we conduct our business, and we may be unable to successfully execute our strategy, engage in favorable business activities or finance future operations or capital needs. A failure to comply with the covenants under the Term Credit Agreement or any of our other future indebtedness could result in an event of default, which, if not cured or waived,developments could have a material adverse effect on our and our consolidated subsidiaries' business, operations, consolidated financial condition, and consolidated results of operations. In the event of any such default, the lenders thereunder, among other things:

·

will not be required to lend any additional amounts to us;

79


93
Table of Contents

·

could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable and terminate all commitments to extend further credit;

·

could require us to apply all of our available cash to repay these borrowings; or

·

could effectively prevent us from making debt service payments on the Notes;

anySignificant market volatility relating to the outbreak of the novel coronavirus (COVID-19) has significantly increased and could in the future significantly increase our liquidity needs, which could result in an event of default under the Notes.

Such actions by the lenders could cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the lenders under the Term Loan Facility could proceed against the collateral granted to them to secure that indebtedness. We pledge substantially all of our assets as collateral under the Term Loan Facility. If any of our outstanding indebtedness under the Term Loan Facility or our other indebtedness were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full. We do not have sufficient working capital to satisfy our debt obligations in the event of an acceleration of all or a significant part of our outstanding indebtedness.

Despite our substantial indebtedness, we may still be able to incur significantly more debt, which could intensify the risks associated with our substantial indebtedness.

We may be unable to remain in compliance with the financial maintenance and other covenants contained in the Term Credit Agreement and our obligation to comply with these covenants may adversely affect our ability to operate our business.

The covenants in the Term Credit Agreement may negatively impact our ability to finance future operations or capital needs or to engage in other business activities. Our Term Credit Agreement requires us to maintain specified financial ratios and tests, including interest coverage and total leverage ratios, which may require us to take action to reduce our debt or to act in a manner contrary to our business objectives. Our Term Credit Agreement also restricts our ability to, among other things, incur additional indebtedness, dispose of assets, guarantee debt obligations, repay other indebtedness, pay dividends, pledge assets, make investments, including in certain of our operating subsidiaries, make acquisitions or consummate mergers or consolidations and engage in certain transactions with subsidiaries and affiliates.

A failure to comply with the restrictions contained in our Term Credit Agreement could lead to an event of default, which could result in an acceleration of our indebtedness. If we default on our indebtedness, our business, financial condition and results of operation could suffer aoperations if we face challenges in obtaining liquidity.


The COVID-19 pandemic and governmental and other responses thereto has caused and may continue to cause substantially elevated volume and volatility, which has and may continue to result in material adverse effect.

Our variable rate indebtedness subjectsincreases in our trading activities both in our market making segment and in our execution services segment. This increase in our activity and our customers’ activity together with the extraordinary volatility has resulted in, and may continue to result in, significantly increased margin

requirements with the National Securities Clearing Corporation (“NSCC”), the Options Clearing Corporation (“OCC”), as well as certain prime brokers, clearing brokers, and other counterparties. In order to manage these increased daily funding obligations, we have taken and may continue to have to take measures to increase available short-term liquidity and to reduce our short term funding requirements, which may require us to interest rate risk, which could cause our debt service obligationsdepend on additional sources of liquidity and upon the availability of third parties for services such as trade clearing, and has required and may continue to increase significantly.

Borrowings under the Term Loan Facility, the Uncommitted Facility and the Committed Facility are at variable rates of interest and exposerequire us to interest rate risk. If interest rates increase, our debt service obligations onlimit certain of our variable rate indebtedness will increase even thoughactivities in certain asset classes or products. If such sources of short-term liquidity or third-party services are not available, or if we encounter challenges obtaining such short-term liquidity or third-party services on terms favorable to us or at all, then our business, financial condition and results of operations may be adversely impacted.


In response to the amount borrowed remainedeffects of the same,outbreak of the novel coronavirus (COVID-19) and in accordance with applicable governmental orders and the guidelines of the Center for Disease Control (CDC), we have implemented our net income and cash flows, including cash available for servicingbusiness continuity plan (BCP), which may disrupt or negatively impact our indebtedness, will correspondingly decrease. We may enter into interest rate swaps that involve the exchangebusiness.

As of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to allSeptember 30, 2020, under our BCP a significant majority of our variable rate indebtedness, and any swaps we enter intoglobal work force was working remotely, which may not fully mitigate our interest rate risk, may prove disadvantageous or may create additional risks.

An increase in market interest rates would increase our interest costs on existing and future debt.

If interest rates increase, so could our interest costs for any new debt and our variable rate debt obligations. This increased cost could make future financing by us more costly, as well as lower our current period earnings. Rising interest rates could limit our abilityvarious risks to refinance existing debt when it matures or cause us to pay higher interest rates upon refinancing.

80

Table of Contents

Risks Related to the Acquisition of KCG

Significant costs and significant indebtedness were incurred in connection with the consummation of the Acquisition of KCG, and the integration of KCG into our business, including legal, accounting, financial advisory and other costs.

We expect to incur significant costs in connection with integrating the operations, products and personnel of KCG into our business. These costs may include:

·

employee retention, redeployment, relocation or severance;

·

integration of information systems;

·

combination of corporate and administrative functions; and

·

potential or pending litigation or other proceedings related to the KCG Acquisition.

The costs related to the Acquisition of KCG could be higher than currently estimated, depending on how difficult it will be to integrate our business with that of KCG, and the expected cost reductions and synergies may not be achieved.

In addition, we expect to incur a number of non-recurring costs associated with combining the operations of KCG with ours, which cannot be estimated accurately at this time.  While we expected to and incurred a significant amount of transaction fees and other costs related to the consummation of the Acquisition of KCG, additional unanticipated costs may yet be incurred.  Any expected elimination of duplicative costs, as well as the expected realization of other cost reductions, efficiencies and synergies related to the integration of our operations with those of KCG, that may offset incremental transaction and transaction-related costs over time, may not be achieved as projected, or at all.

In addition, we incurred $1,650.0 million of new indebtedness in connection with the Acquisition of KCG, $200.0 million of which we have voluntarily prepaid.  The debt we have incurred in connection with the Acquisition of KCG may limit our financial and operating flexibility, and we may incur additional debt, which could increaseinclude the risks associated with our substantial indebtedness.  Our substantial indebtedness may have material consequences for our business, prospects, results ofa computer systems and software failure, cyber risks, capacity constraints, malfunctions and delays. Risks associated with trading operations, financial condition and/reporting, internal controls and other key functions and responsibilities may also be elevated, as employees rely on critical technologies to communicate and collaborate and perform core functions remotely. The risk of further disruption or cash flows. 

Integrating KCG’sadverse impact may also be heightened as and when governmental orders are lifted or relaxed and we begin to reintegrate our personnel and business into our business may divert management’s attention away from operations, and we may also encounter significant difficulties in integrating the two businesses.

The Acquisition of KCG involves the integration of two companies that have previously operated independently.  The success of the Acquisition of KCG and their anticipated financial and operational benefits, including increased revenues, synergies and cost reductions, will depend in part on our ability to successfully combine and integrate KCG’s business into ours, and there can be no assurance regarding when or the extent to which we will be able to realize these increased revenues, synergies, cost reductions or other benefits.  These benefits may not be achieved within the anticipated time frame, or at all.

Successful integration of KCG’s operations, products and personnel may place a significant burden on management and other internal resources. The diversion of management’s attention, and any difficulties encountered in the transition and integration process, could harm our business, prospects, results of operations, financial condition and/or cash flows.

In addition, the overall integration of the businesses may result in material unanticipated problems, expenses, liabilities, and competitive responses.  The difficulties of combining the operations of the companies include, among others:

·

difficulties in achieving anticipated cost reductions, synergies, business opportunities and growth prospects from the combination;

81

Table of Contents

·

difficulties in the integration of operations and systems;

·

conforming standards, controls, procedures and accounting and other policies, business cultures and compensation structures between the two companies;

·

difficulties in the assimilation of employees and the integration of the companies’ different organizational structures;

·

difficulties in managing the expanded operations of a larger and more complex company with increased international operations;

·

challenges in integrating the business culture of each company;

·

challenges in attracting and retaining key personnel; and

·

difficulties in replacing numerous systems, including those involving management information, purchasing, accounting and finance, sales, billing, employee benefits, payroll, data privacy and security and regulatory compliance, many of which may be dissimilar.

These factors could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy, which could materially impact our business, prospects, results of operations, financial condition and/or cash flows.

We may not realize the anticipated synergies, net cost reductions and growth opportunities from the Acquisition of KCG.

The benefits that we expect to achieve as a result of the Acquisition of KCG will depend, in part, on the ability of the combined company to realize anticipated growth opportunities, net cost reductions and synergies.  Our success in realizing these growth opportunities, net cost reductions and synergies, and the timing of this realization, depends on the successful integration of our historical business and operations and the historical business and operations of KCG.  Even if we are able to integrate the businesses and operations of the Company and KCG successfully, this integration may not result in the realization of the full benefits of the growth opportunities, net cost reductions and synergies that we currently expect from this integration within the anticipated time frame or at all.  For example, we may be unable to eliminate duplicative costs.  Moreover, we may incur substantial expenses in connection with the integration of our business and KCG’s business.  While we anticipate that certain expenses will be incurred, such expenses are difficult to estimate accurately and may exceed current estimates.  Accordingly, the benefits from the Acquisition of KCG may be offset by costs or delays incurred in integrating the businesses.  We projected net cost reductions and synergies are based on a number of assumptions relatingoffice locations pursuant to our business and KCG’s business.  Those assumptions may be inaccurate, and, as a result, our projected net cost reductions and synergies may be inaccurate, and our business, prospects, results of operations, financial condition and/or cash flows could be materially and adversely affected.

The Company will be subjectreturn to business uncertainties that could materially and adversely affect our business.

Uncertainty about the effect of the Acquisition of KCG on employees, customers and suppliers may have both a material and adverse effect on the Company.  These uncertainties may impair the Companies’ ability to attract, retain and motivate key personnel, and could cause customers, suppliers and others who deal with the Company to seek to end, suspend or change existing business relationships.  If key employees depart because of issues related to the uncertainty and difficulty of integration or a desire not to remain with us, or if customers, suppliers or others seek to end, suspend or change their dealings with us as a result of the Acquisition of KCG, our business could be materially and adversely impacted.

In connection with the Acquisition of KCG, we have assumed potential liabilities relating to KCG’s business.

In connection with the Acquisition of KCG, we have assumed potential liabilities relating to KCG’s business.  For example, KCG is currently the subject of various regulatory reviews and investigations by federal, state and foreign regulators and SROs, including the SEC, the Financial Industry Regulatory Authority, Inc. and the FCA. In some instances, these matters may rise to a disciplinary action and/or a civil or administrative action. To the extent we have not

office policy.

82


Table of Contents

identified such liabilities or miscalculated their potential financial impact, these liabilities could have a material adverse effect on our business, prospects, results of operations, financial condition and/or cash flows.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


Pursuant to the exchange agreement (the "Exchange Agreement"“Exchange Agreement”) entered into on April 15, 2015 by and among the Company, Virtu Financial and holders of non-voting common interest units in Virtu Financial (the “Virtu Financial Units”),Units, Virtu Financial Units (along with the corresponding shares of our Class C common stockCommon Stock or Class D common stock,Common Stock, as applicable) may be exchanged at any time for shares of our Class A common stockCommon Stock or Class B common stock,Common Stock, as applicable, on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications.

Pursuant


94
Table of Contents
Total share repurchases for the three months ended September 30, 2020 were as follows:

PeriodTotal Number of Shares Purchased (1)Average Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsApproximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2020 - July 31, 2020
Class A Common Stock / Virtu Financial Units repurchases6,569 24.07 N/AN/A
Class C Common Stock/ Virtu Financial Units repurchases— — —
August 1, 2020 - August 31, 2020
Class A Common Stock / Virtu Financial Units repurchases73,001 25.69 N/AN/A
Class C Common Stock/ Virtu Financial Units repurchases— — —
September 1, 2020 - September 30, 2020
Class A Common Stock / Virtu Financial Units repurchases— — N/AN/A
Class C Common Stock/ Virtu Financial Unit repurchases— — —
Total Common Stock / Virtu Financial Unit repurchases79,570 $25.56 —$—
(1) Comprises the repurchase of 79,570 shares from employees in order to satisfy statutory tax withholding requirements upon the Exchange Agreement, on August 16, 2017, certain current and former employees elected to exchange 155,009 Virtu Financial Units (along withnet settlement of equity awards for the corresponding shares of our Class C common stock) held on their behalf on a one-for-one basis for shares of our Class A common stock. The shares of our Class A common stock were issued in reliance on the registration exemption contained in Section 4(a)(2) of the Securities Act, on the basis that the transaction did not involve a public offering. No underwriters were involved in the transaction.

three months ended September 30, 2020.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES


None.


ITEM 4. MINE SAFETY DISCLOSURES


None.


ITEM 5. OTHER INFORMATION

None.


83

None.

95

Table of Contents

ITEM 6. EXHIBITS

Exhibit��Number

Description

3.1

Exhibit Number

Description

10.1*†
10.2*†

3.2

31.1*

Amended and Restated By-laws of Virtu Financial, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q, as amended (File No. 001-37352), filed on May 29, 2015).

4.1

Escrow End Date Supplemental Indenture, dated as July 20, 2017, by and among VFH Parent LLC, Orchestra Borrower LLC, Orchestra Co-Issuer, Inc. Virtu Financial LLC, the other parties that are signatories thereto as Guarantors and U.S. Bank National Association (incorporated herein by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q (File No. 001-37352), filed on August 9, 2017).

10.1

Stockholders Agreement, dated April 20, 2017, by and among Virtu Financial, Inc., TJMT Holdings LLC, Aranda Investments Pte. Ltd., Havelock Fund Investments Pte Ltd. and North Island Holdings I, LP. (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 001-37352), filed on May 10, 2017).

10.2

Amended and Restated Registration Rights Agreement, dated April 20, 2017, by and among Virtu Financial, Inc., TJMT Holdings LLC, Aranda Investments Pte. Ltd., Havelock Fund Investments Pte Ltd., North Island Holdings I, LP and the additional holders named therein. (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q (File No. 001-37352), filed on May 10, 2017).

31.1*

Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

32.2*

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

101.LAB

XBRL Taxonomy Extension Label Linkbase

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

101.DEF

XBRL Taxonomy Extension Definition Document

*  Filed herewith.

84

Table of Contents

EXHIBIT INDEX

Exhibit Number

Description

3.1

Amended and Restated Certificate of Incorporation of Virtu Financial, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q, as amended (File No. 001-37352) filed on May 29, 2015).

3.2

Amended and Restated By-laws of Virtu Financial, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q, as amended (File No. 001-37352), filed on May 29, 2015).

4.1

Escrow End Date Supplemental Indenture, dated as July 20, 2017, by and among VFH Parent LLC, Orchestra Borrower LLC, Orchestra Co-Issuer, Inc. Virtu Financial LLC, the other parties that are signatories thereto as Guarantors and U.S. Bank National Association (incorporated herein by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q (File No. 001-37352), filed on August 9, 2017).

10.1

Stockholders Agreement, dated April 20, 2017, by and among Virtu Financial, Inc., TJMT Holdings LLC, Aranda Investments Pte. Ltd., Havelock Fund Investments Pte Ltd. and North Island Holdings I, LP. (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 001-37352), filed on May 10, 2017).

10.2

Amended and Restated Registration Rights Agreement, dated April 20, 2017, by and among Virtu Financial, Inc., TJMT Holdings LLC, Aranda Investments Pte. Ltd., Havelock Fund Investments Pte Ltd., North Island Holdings I, LP and the additional holders named therein. (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q (File No. 001-37352), filed on May 10, 2017).

31.1*

Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

32.1*

32.2*

101.INS

101.INS*

XBRL Instance Document

101.SCH

101.SCH*

XBRL Taxonomy Extension Schema

101.CAL

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase

101.LAB

101.LAB*

XBRL Taxonomy Extension Label Linkbase

101.PRE

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase

101.DEF

101.DEF*

XBRL Taxonomy Extension Definition Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*  Filed herewith.

† Management contract or compensatory plan or arrangement.

85


96

Table of Contents

SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Virtu Financial, Inc.

DATE:

November 9, 2017

6, 2020

By:

/s/ Douglas A. Cifu

Douglas A. Cifu

Chief Executive Officer

DATE:

November 9, 2017

6, 2020

By:

/s/ Joseph Molluso

Sean P. Galvin

Joseph Molluso

Sean P. Galvin

Chief Financial Officer

86

97